Saturday, June 10, 2006

Just Who Is Marcel Arsenault?

Interesting piece on little known real estate investor Marcel Arsenault by John Rubino:

Look Out Below

Back in the late 1980s, Marcel was a hippy/entrepreneur in the Ben & Jerry mold who had spent the previous decade mixing up vats of Mountain High yogurt, eventually turning the brand into one of the most popular in the West and selling it Beatrice Foods for a nice profit. He then started buying up Colorado real estate. “I couldn’t have picked a worse time,” he says now. The junk bond implosion was metastasizing into the S&L collapse, and the value of office buildings and shopping malls was plunging.

But he held on, and in a couple of years was rewarded with the mother of all fire sales. The government began liquidating the assets it had acquired from failed thrifts, and prime properties were suddenly available for pennies on the dollar. Marcel loaded up on empty office buildings and leased them out for a fraction of the going rate—possible because of the low purchase price. The buildings filled up, their values rose, and he leveraged their cash flow to buy more offices, shopping malls and condos. As western real estate values soared, so did Colorado Santa Fe’s portfolio. It now manages upwards of $350 million of property and is sitting on well over $100 million of unrealized capital gains.

In other words, this is a guy who has prospered in both good and bad real estate markets, which makes his current take worth noting. And right now he’s excited—about the prospect of another 1990-style crash. Below are some excerpts from the previously mentioned report. The capitalized headings and italicized comments are mine, the rest is Marcel’s. As your read this, keep in mind that it’s the analysis of someone who for the past fifteen years has been very successfully LONG real estate.
We believe that the apparent ‘irrational exuberance’ in the real estate market is, in reality, an asset bubble that has been inflated by a flood of capital attracted to real estate. The effect of this flood has been to drive down yields and push up prices. We believe this value trend is unsustainable and that we are at a crucial inflection point. Based on the analysis detailed below, we believe that cap rates will inevitably rise back to trend (and possibly overshoot), thus driving values down dramatically.

Phase I: Stimulus through Monetary Easing. Following the recession and 9-11, the U.S. Federal Reserve implemented monetary easing to a degree not seen in almost 50 years. Cheap money and credit flooded the U.S. economy in an effort to prevent a serious recession (which had the risk of turning deflationary like Japan’s). The lax monetary policy had the intended effect of stimulating consumer spending (particularly on assets like homes and real estate).

Phase II: Illusion Becomes Reality. By 2003, prices of real estate began rising faster than the rate of inflation. In effect, investors began noticing how “profitable” it was to accumulate real assets. Rising prices created a “virtuous cycle” whereby more and more buyers participated in the equation of purchasing real estate. While admittedly rising prices were driving down yields, few cared about yield because the Fed was not rewarding saving. The preferred game was appreciation.

Phase III: Lenders “Pile In” (the final period of play). Given a few years of rising prices, real estate began looking very safe; low rates made the cost of debt very manageable, justifying higher prices and larger loans. By 2005 real estate lending was extraordinarily competitive, (after all, default rates were at historic lows). By 2006, cheap and easy mortgages had grown to epic proportions throughout the real estate industry. “No money down” became the way to purchase a home. Foreign and hedge fund capital poured into mortgage markets chasing yields of the “risky” tranches of mortgage paper (why settle for the 5% yield of “A tranche” if the risky “B tranche” yielded at 8-10%?) With rising property values, the “B tranches” were soon re-rated to “A”, rewarding the buyers with phenomenal appreciation in their mortgage paper. Mortgages become more plentiful and the tide of easy money rises into uncharted territory, and bringing real estate values even closer to rocky shores hidden beneath a tidal flood.

Phase IV: Inflection Point Achieved (the cost of money rises). Satisfied that it had prevented a serious deflationary recession, by June 2004 the Federal Reserve begins to slowly increase rates. By 2006, the Fed Rate had increased from 1% to 4.5% (the “neutral rate” – not deemed excessively simulative by economists). With yields this high, it again makes sense to hold cash at the bank. By 2006, the cost of mortgage debt is returning to the long term average.

Phase V: - The Future: Look Out Below. The problem becomes obvious and virulent when real estate values begin to fall. With debt service costs rising, real estate begins to flounder, and more risky real estate ends up on the rocks. As default rates rise, mortgages slowly become more expensive and difficult to obtain (“real estate becomes a four letter word” in the parlance of an old banker). Only brave and knowledgeable entrepreneurs venture onto the scene of real estate wreckage at the lowest tide. Only a “foolhardy lender” would venture between the rocks of the now quiet ebb tide.

The “virtuous cycle” has completed its turn into the “vicious cycle.”

The piece includes a report by Mr. Arsenault with an interesting conclusion, he plans to liquidate most of his real estate investments.

Caveat Emptor!

Sellers: Your Home Isn't Worth What You Think

From ABC News:

How Much Is Your Home Worth?

Over recent months, rising interest rates and increasing inventory have turned the real estate market into one favoring buyers instead of sellers, making it more imperative than ever to price your home correctly, experts said.

For starters, realize that the market has changed and that your home many not fetch as much as it would have six months or one year ago. The house may also take longer to sell in this environment.

"People won't overpay for houses in this market," said Jim Gillespie, president and chief executive officer of Coldwell Banker Real Estate Corp., which has more then 3,300 offices and operates in all 50 states.

Experts advise contacting several real estate brokers to ask them what your home is worth. The agent should be able to provide you with sales figures for comparable homes in your neighborhood to establish a starting point. Make sure they are comparing your home to others with a similar size and characteristics. However, if the most recent sales are over six months to a year old, a seller should consider making a downward price adjustment.
Keep your emotions in check when determining a price, experts advised. "Most people aren't realistic (when it comes to pricing their home). It is human nature to think your home is worth more than it probably is," Gillespie said.
The worst decision a seller can make is to set the price too high to leave room for downward negotiation. The price can be lowered somewhat, and initially you may need to tinker with it. But generally, homes attract the most buyers in the first few weeks on the market, and if potential purchasers are turned off by an exorbitant price, they'll just go look elsewhere.

Isn't it amazing how quickly psychology has shifted? Can you even imagine reading a piece like this a year or two ago? At this rate the market is going to be unrecognizable by December.

Caveat Emptor!

Helmsley's Chef Duped In Real Estate Deal

From the Record/Herald:

Helmsley ex-chef's claim to fee disputed

Chef Dennis Sammarone may have offered his goodwill to set up a meeting between his former boss, Leona Helmsley, and a developer who bought an expensive tract in Fort Lee from her.

But that gives him no legal claim to a share of the $46.3 million deal, the developer's attorney argued in a Hackensack courtroom Friday.

"If you don't have a broker's license, you are barred from any attempts to collect a commission," said Stuart Glick, the attorney for developer James Bovino.
Sammarone was a longtime cook and a close friend of Helmsley's. His former boss's "difficult personality was virtually legendary," and she wasn't even taking Bovino's calls until Sammarone got involved, said the chef's attorney, Angelo Genova.
"You have one of the most successful developers in the region going to the [negotiation] table with a chef," Genova said. "Who is being taken advantage of? They duped him. They used him. They got what they wanted. And now they want to drop him like a hot potato."

Tax Sale Season

From The Trenton Times:

Tax sale a deal for some in N.J.

Anyone looking for a housing or business bargain may soon have the opportunity to buy one for less than the price of a new car, or, in some cases, the cost of a movie and large popcorn.

As the end of the state's fiscal year draws to a close, several New Jersey municipalities are beginning preparations for an accelerated tax sale to wipe delinquent tax bills off their books.

The liens range in price from only a few dollars to tens of thousands and run the gamut of properties from one-bedroom bungalows to sprawling office buildings.

The tax sales are a win for the municipalities and a win for the investors savvy enough to purchase a lien. For a fraction of a property's true value, a speculator can purchase a lien, which obligates a property owner to pay back the delinquent amount, with interest, or risk foreclosure. The interest rates can be as high as 18 percent.
But there are downfalls to the system.

If the list of delinquent taxpayers is made up largely of residents instead of businesses, the tax sales can hurt the very people the township is trying to help.

"It's a balancing act," said Belluscio. "You may be collecting the money but at the same time you may be hurting taxpayers, particularly elderly taxpayers who may be having some trouble paying."

Who Benefits From Abatements?

From the Jersey Journal:

It's time to stop tax abatements, but city loves 'em

Decade after decade, administration after administration, real estate developers in Jersey City have benefited from generous tax abatements - and in return, politicians have benefited from generous campaign checks.

The developers love these deals, not only because the amount paid in lieu of taxes (PILOTs) is generally lower than what they'd be assessed under conventional taxation, but also because - with a 20-, 30- or 40-year agreement in place - they're shielded from the uncertainty of the ever-rising tax bill.

And the city loves abatements because, unlike conventional taxes, the city gets to keep almost all the money: Very little is shared with the county, and nothing at all with the school board.
At the same time the city is raising property taxes 18 percent, the county wants to increase taxes on Jersey City residents by 9 percent. But perhaps the biggest payout is yet to come: Gov. Jon Corzine is making serious noises about requiring school districts under state control - that includes Jersey City - to contribute more to their school board budgets. Jersey City's school taxes have remained flat for over a decade, with the state contributing any increase it deemed necessary.
In fact, some even say they have no choice but to give abatements. Since they've given them in the past, it wouldn't be fair to not give them in the future.

The concern for millionaires and billionaires is touching. But wouldn't it be nice if they evinced similar compassion for the senior citizens and working stiffs just trying to hold onto their homes in the face of increased water, utility, gas and property tax rates?

Friday, June 09, 2006

The Housing Tune Is Changing

Just when I thought the afternoon couldn't get any slower, along comes this bombshell from the Motley Fool:

I Want My Bubble Back!
By Seth Jayson

There's nothing funnier or more satisfying (for me, at least) than watching the National Association of Realtors (NAR) change its tune these days. The latest news release from this sunny-Jim industry group finally fesses up to its past fiction, but even when it admits the bubble's going to pop, it can't muster the courage to just come out and say it.

Nope, according to the news template the NAR released to the press on June 6, "The housing boom has ended, but sales at historically healthy levels will continue."

Wow, sounds great! What about all those poor HGTV-addled suckers -- oops, I mean investors -- who've been buying property on interest-only ARMs with the hopes of flipping it for an easy profit?

Not to worry, folks -- a flop in prices is good! Here's why, according to the NAR. "Experiencing a slowing from a hot market is a good thing because we need a solid housing sector to provide an underlying base to the economy, and slower appreciation will help to preserve long-term affordability."

I hope all those people out there who leveraged themselves up to their eyeballs with risky loans to get into the market are going to be greatly comforted by the "long-term affordability" their homes may offer the buyers of the future.
So, yeah, the NAR is full of it and will spin the numbers any way it can to keep up the pleasant fiction that all is well. But the cracks began to show in subsequent remarks from NAR "Chief Economist" David Lereah. The head outfit that ridiculed the idea of a housing bubble for years is now crying for Ben Bernanke to bring it back.
The real problem here isn't the NAR, of course. You have to expect these people to spin the facts for their industry, even if that means they're putting their checkbook concerns ahead of yours, and even if it leaves them begging the Fed for an adherence to shortsighted economic policies that could send inflation spiking.

No, the real problem here is the uncritical press out there, which is all too happy to pepper every contrary indicator or bearish remark with an NAR official's informed-sounding bubble denial. Never mind if what the NAR folks are saying doesnt seem to make sense (or contradicts what they said just a few months back). Hey, opposing viewpoints give the appearance of objectivity, and they're an easy way of pretending to have looked for truth. It keeps your editor off your back, and if people out there get burned on account of your waffling reportage, no one can say they weren't warned. Look, here's the quote from the other guy!
Those home industry advertisements might feature kitties and puppies, blue skies and little girls with dimples frolicking in the home of your dreams, but the people putting together those ads measure their success by how many greenbacks they can extract from your wallet. The only person out there who's really looking out for your financial well-being is you.

Weekend Open Discussion

Since it's pretty quiet on the housing front today, I'll open up the weekend thread earlier than usual.

Observations about your local areas, comments on news stories or the New Jersey housing bubble, Open House reports, etc. If you have any questions you wanted to ask earlier in the week but never posted them up, let's have them.

For readers that have never commented, there is a small link on the bottom of each new message that reads "# Comments". Go ahead and give that a click, you might be missing out on a world of information you didn't know about. While you are there, introduce yourselves to everyone. For new readers that have only read the messages displayed on the main page, take a look through the archives, a substantial amount of information has been put online in the past 6 months. The archives can be found at the bottom of the right hand menu and are categorized by month.

As always, anything goes!

Caveat Emptor!

Redevelopment of the Bayonne MOT

From the Star Ledger:

Stark contrasts in 'Peninsula' visions

Is there a container port in Bayonne's future? Tuesday's mayoral runoff election could determine the outcome.

Patrick Conaghan, who wants to unseat Mayor Joseph V. Doria Jr., says the city must redevelop the former 430-acre Military Ocean Terminal - now known as the Peninsula at Bayonne Harbor - as a container facility to reap an immediate financial windfall and for years to come.

Doria, who only a few years ago had championed the idea of containers and luxury homes co-existing at the MOT, now warns in campaign ads that a container port would translate to massive problems with traffic, security and taxes. He advocates a mixed-use development of the MOT.

The MOT redevelopment plan drafted by the Bayonne Local Redevelopment Authority (BLRA) calls for a 125-acre maritime industrial district now partly occupied by the Royal Caribbean International cruise line

James Hughes, a dean with the Eagleton Institute for Policy and Planning, said that given the importance of shipping, warehousing and distribution of goods to the state's economy, coupled with rising interest rates and the prospect of a saturated housing market, it would make sense for Bayonne to explore the potential use of a container port.

I'm somewhat surprised to see those comments from Hughes. Not that he hasn't always been a champion of business and smart growth, but that the basis of his argument is that the housing boom is over.

Caveat Emptor!

NJ Unemployment Fund Underfunded

Just when you thought that the business climate in New Jersey couldn't possibly get any worse..

From the Star Ledger:

Recession could trigger large corporate tax hike

New Jersey's fund for paying unemployment benefits is so de pleted that even a moderate reces sion would push the fund into bankruptcy and trigger an enor mous corporate tax increase, the state labor commissioner told a Senate committee yesterday.

The fund has a balance of $850 million -- about enough to cover six months of payouts during good economic times, said Commis sioner David J. Socolow. Only three years ago, the fund had a balance of more than $3 billion.

He said the fund has been battered by the state's decision to divert tax revenues from it to pay for hospital services for the poor. Those diversions have cost the fund about $4.7 billion since 1993.

"We're not ready for a recession," he told a special hearing of the Senate Labor Committee.

This year the fund narrowly missed falling so low that it would have triggered a $200 million tax hike. Next March, Socolow said, a tax hike will be unavoidable if any money is diverted from the fund in the upcoming state budget year or if the state slips into recession.

A minor recession seems inevitable for New Jersey, should the housing bubble burst. A significant number of construction and other housing-related jobs have been added as a result of the housing boom. But history is not on our side. In the two year period after the prior housing bubble burst in the late 80's, New Jersey lost more than 40,000 construction-related jobs. It took almost 12 years to recover those jobs.

Caveat Emptor!

Thursday, June 08, 2006

Give ‘em Back Boys

Perhaps Raines and Co. didn’t get away scott-free after all…

From the Washington Post:

U.S. Seeks to Recover Fannie Mae Bonuses

The government will pursue some Fannie Mae executives to recover bonus money they reaped in an accounting scheme _ if the mortgage giant itself fails to do so.…The OFHEO, which Lockhart would head if confirmed, last month issued a scathing report alleging a six-year accounting fraud at Fannie Mae, the largest U.S. buyer and guarantor of home mortgages. It said employees manipulated accounting to hit company quarterly earnings targets so senior executives could pocket hundreds of millions in bonuses from 1998 to 2004.

“The first line of defense is that the board of Fannie Mae should go after these individuals and try to get restitution” of some of the bonus money, Lockhart testified. The directors owe the shareholders no less, he said, and if they fail to do so his agency will pursue the executives.…Lockhart did not name any current or former Fannie Mae executives. But at a hearing Tuesday by a House panel, he blamed ousted former chief executive Franklin Raines by name and other senior company officials for the massive accounting failures and alleged manipulations designed to enrich executives.

Raines, a prominent Washington figure who was a White House budget director in the Clinton administration, earned more than $90 million from 1998 to 2003, according to the report _ including some $52 million in bonuses directly tied to the company hitting earnings targets. He is one of 30 current and former executives and employees who are under review by the Fannie Mae board for possible disciplinary action, termination or forfeiture of their bonuses.

Discuss this topic

Upcoming Changes!

The blog will be undergoing many changes in the next few weeks. All for the better.

First, the message board is finally live! There will be some tweaks to the look and feel over the next few weeks, but it's up and running. Stop by, register, and try it out. The message board format is much more user friendly than the comments interface here.

New Jersey Real Estate Forum

Like any other online community, it's going to take time to build. So if you don't see much activity over the next few days, don't be discouraged. Post a message, reply to another, activity will build up as more and more people sign up.

I'm sure many of you have been frustrated trying to access the blog recently. The comments section has been down for long periods of time over the past few days. I've had it with blogger, so I've decided to move the blog to another system. Believe me when I say that I didn't want to do it, but I don't have much other choice. I'll make the new link known as soon as the new blog goes live. For those who have no idea what I'm talking about, don't worry, you'll be automatically taken to the new blog.

If the site is currently giving you a problem, drop by the message board. A number of users have already found it and are posting there.

Caveat Emptor!

Glen Ridge Tax Sales

An interesting piece on tax sales in Glen Ridge, NJ. For those who don't know about Glen Ridge taxes, they are some of the highest in the state. The author provides a nice little primer on the tax sales process.

From the Glen Ridge Paper:
Delinquent property taxes costing residents
By Daniel Hooks

Homeowners who failed to pay property taxes last year in Glen Ridge will have their debts sold next week to private investors, who can charge up to 18 percent interest to homeowners on top of the principal debt.

On June 17, Glen Ridge Tax Collector Donna Altschuler will sell the town’s property tax-related debts to private investors in a tax sale; an annual event practiced by virtually every municipality in the state in an effort to regain monies not collected from homeowners.

“The state actively encourages municipalities to sell their debt because the municipality is responsible for collecting taxes and then paying out money to the board of education and the county,” said Michael Rohal, town administrator of the borough.

“If taxes are not collected, the municipality is responsible for paying off any differences to the board of education and county, and therefore it benefits the town to get rid of debt,” said Rohal.

Private investors will bid on outstanding debts owed to the borough from delinquent property tax payments, and in return will earn the right to put a lien on the properties in question, according to Altschuler.
When an investor wins the right to pay off the debts to the town, he can also begin foreclosure on the property if he chooses to, though both Altschuler and Conway said that foreclosures are extremely rare.

Caveat Emptor!

Housing in the Fed Crosshairs?

Is the Fed actively targeting housing? Not likely.
Are they concerned about housing? Absolutely.
Will that stop them from tightening? No.

Unfortunately, I see only two scenarios in the near future, inflation or a housing bubble burst. In reality, it is the housing bubble that is the lesser of those two evils. Why? It is going to be much easier to mop up after a bubble-induced recession than it would be to control runaway inflation.

From BusinessWeek:
Will Bernanke Tank Housing?
By Peter Coy

Ouch. It's getting harder and harder for real estate agents to put a happy face on the market. Sales are slowing, prices are falling, and the backlog of unsold homes is rising fast. And now it's suddenly looking like the Federal Reserve will raise interest rates again.
Bernanke's gladiator-like aggressiveness on inflation is producing scowls at the National Association of Realtors, which worries that higher mortgage rates will make the housing market even softer. The group put out a public statement on the issue this week, in which David Lereah, the Realtors' chief economist, said: "This is a time for the Fed to pause on rate hikes because we have some interest-sensitive housing markets that have become vulnerable."
until his June 5 speech, Bernanke gave the impression that he was being careful not to tank the housing market, vowing in congressional testimony on Apr. 27 to "monitor housing markets closely." Since then, though, the housing market has done nothing but weaken, points out David Rosenberg, Merrill Lynch's chief North American economist. Housing starts are down over the past three months at a 56% annual rate. "So Mr. Bernanke is 'monitoring,' all right," Rosenberg wrote in a report on June 7. "He's monitoring the collapse of the housing market, and by the sounds of it he wants to reinforce the bear market already under way."
Mortgage bankers also see the market slowing, but they aren't echoing Realtors in asking for a pause in rates. That could be because they, like the Fed, hate inflation -- it erodes the value of the fixed-rate loans they make. "We've never publicly given the Fed instruction on how to conduct monetary policy," Douglas Duncan, chief economist of the Mortgage Bankers Assn., said June 7.
To put it differently, some economists say: What goes up must come down. One housing bear, Ian Shepherdson, chief U.S. economist for High-Frequency Economics in Valhalla, N.Y., wrote June 6: "Ultimately, we expect the level of home sales to head down to, or even below, the long-term trend. When bubbles burst, they usually burst properly. Gentle deflations are rare."

Caveat Emptor!

Hoboken Garage Flip

Just an update on a story posted a few weeks ago on the Hoboken garage deal on the verge of backfiring. Apparently, even local government thinks that they can flip properties for huge profits..

From the Jersey Journal:
Hoboken's finance tricks backfire

If the past decade of real estate sales is any indication, what hotter place is there than Hoboken to acquire property and then develop it for a small fortune?

This must have been on the minds of city officials when they decided to buy the garage back from the Hudson County Improvement Authority and then sell it to a developer at a substantial profit to fill a $5 million budget shortfall in the 2006 municipal budget.

City officials said they expected bids of about $30 million for the new redevelopment zone approved in March. Those hopes were seriously dashed when the property attracted only two underwhelming bids. Of interest to some political watchers were the identities of the bidders.

A group calling themselves Metro-Ran Garage Stop LLC offered $22.1 million as a bid. This is a partnership consisting of former city Councilman Robert Ranieri Jr., New York-based developer Dean Geibel, who is familiar to Sixth Street Embankment advocates in Jersey City, who see Geibel as thwarting their open-space hopes, and Louis Picardo, who is Hoboken's tax collector.

Unfortunately, or fortunately if you are the high bidder, Hoboken needs to come up with $5 million by June 30, the last day of the fiscal year, or the city will have to refinance the debt with the county at a much higher rate.

Development groups made up of politicians? Reeks of corruption to me...

Caveat Emptor,

Living the American Dream

This one comes to us from the 'Ask the Biz Brain' column in today's Star Ledger. I thought it might be appropriate since the discussion (derision) of high-debt living has become a hot topic lately.

Ask the Biz Brain

My husband and I have incurred about $30,000 in credit-card debt with varying interest rates. We have no savings, two young children and own a home with a mortgage and home-equity line of credit (which is tapped). We recently received a windfall of about $15,000. What is our best course of action?

I'm speechless every time I read one of these stories. We don't know their story, so we really shouldn't judge, but somehow I have a feeling it wasn't medical expenses that caused this family to max their HELOC and rack up $30k in high interest debt. So just how common is this scenario?

All too common is my guess. While we're on the subject of debt, Consumer Credit increased at the fastest pace in almost a year in April.

Credit Spending, Auto Loans Up in April

Americans increased their borrowing in April at the fastest pace in 10 months as credit card spending and auto loans both picked up.

The Federal Reserve reported Wednesday that consumer borrowing rose at an annual rate of 5.9 percent in April, a significant increase from a tiny 0.8 percent gain in March.

The increase in dollar terms was $10.6 billion, which pushed total consumer credit to a record $2.17 trillion. The Fed's measurement of consumer credit does not include mortgages and other loans secured by real estate.

For April, consumer borrowing on credit cards and other types of revolving loans rose at an annual rate of 4.5 percent after having fallen by 2.3 percent in March.

Caveat Emptor!

Wednesday, June 07, 2006

6% Fed Funds Rate - "Monetary Policy Nirvana"

From the Wall Street Journal:

Economic Rehab

"The stock, bond, currency and commodity markets are bouncing around wildly. While there are many crosscurrents, monetary policy and economic data are front and center in day-to-day market volatility. As a result, some market observers are trash-talking the new Federal Reserve Board chairman, Ben Bernanke, and blaming him for all sorts of perceived missteps."

"This is unfair. Mr. Bernanke is doing a fine job. The inflationary pressures he is fighting today were baked in the cake before he arrived. Monetary policy was overly accommodative for too long, and even after 16 rate hikes the Fed has not yet reached neutral. Weaning investors, home builders, hedge funds and proprietary trading desks from 50-year low interest rates is like forcing them to quit smoking: It's good for the health of the economy, but it hurts and they are complaining loudly."

"Historically, housing has been a solid leading indicator of business cycles, but the special circumstances of recent years suggest that this time it is sending a misleading signal. And while some believe that a slowdown in housing will undermine consumer spending, this fear is overblown. Cash-out financing (or mortgage equity withdrawal) may have increased spending for those who took advantage of low interest rates to refinance, but every dollar of borrowing was funded with someone else's savings."

"In other words, there is little evidence that rates have reached a level that is detrimental to the economy. The Fed is not tight; it is just less loose. This can be seen in real time by watching market-based indicators. Commodity prices remain elevated and the dollar continues to weaken; both suggest excess money creation. Moreover, the economy has not experienced a recession in over 45 years without the federal funds rate rising above nominal GDP growth. In the past year nominal GDP growth has been 6.9%, so with the federal funds rate at 5%, monetary policy is still accommodative."

"Nonetheless, the Fed is very close to a neutral monetary policy. Using nominal GDP as a target, and looking back historically, a neutral rate is likely close to 6%. If the Fed could get rates to this level soon, the economy could continue to grow based on underlying entrepreneurial activity and productivity -- a rate estimated to be 3.5% or 4% per year. A neutral rate would also put a lid on inflation, stabilize the dollar and cap commodity prices, including oil. A 6% federal funds rate would be monetary policy nirvana."

-Hat tip to ChicagoFinance for this piece.

Corzine Building 100,000 Affordable Homes?

From the AP:

Corzine wants to build 100,000 affordable homes over next decade

"Plans will be set by the end of the year to build 100,000 homes for low-income New Jerseyans over the next decade, Gov. Jon S. Corzine said today as he vowed to spend more money on renters and the homeless."

"Corzine said he expects housing officials to finalize within the next six months a blueprint to expand affordable housing throughout New Jersey, where tens of thousands of people are awaiting housing help."

"'Affordable housing is the basic building block for transforming lives,' Corzine told about 250 members of the Housing & Community Development Network of New Jersey during a meeting inside a capital city hotel."

"New Jersey is the most expensive state for homeowners and the third most expensive state for renters, according to the U.S. Census."

"Corzine said he hasn't estimated a cost for his plan, but said substandard housing often leads to social ills such as crime and health problems that cost the state money."

Northern New Jersey Weekly Inventory Update

(Garden State Multiple Listing Service)
Single Family Homes, Condo, Coop
(Bergen, Essex, Hudson, Morris, Passaic, Somerset, Sussex, Union, Warren Counties)

5/31 - 17,345
6/7 - 17,708 (2% Weekly Increase)

(New Jersey Multiple Listing Service)
Single Family Homes, Condo, Coop
(Bergen, Essex, Hudson, Passaic Counties)

5/31 - 8,563
6/7 - 8,725 (1.9% Weekly Increase)

MLSGuide -
Single Family Homes, Condo, Coop
(Hudson County)

5/31 - 2,406
6/7 - 2,568 (6.7% Weekly Increase)

Home Loan Applications Mostly Flat

From Reuters:

US home refinancings at 2006 low despite rates dip

"U.S. home loan refinancing applications last week sunk to their lowest this year and new home mortgages barely budged, lending support to the view that even lower interest rates will not heat up the already cooling U.S. housing market, an industry group's figures showed on Wednesday."

"The Mortgage Bankers Association's seasonally adjusted index of mortgage application activity -- which is made up of both refinancing and purchasing loans -- fell 1.4 percent to 534.4 in the week ending June 2 from the previous week's 541.9."

"The seasonally adjusted refinancing index last week fell 3.8 percent to 1,356.0, its lowest level since the week ended Dec. 30, 2005 when its reached 1,363.2."

"A year earlier the index stood at 2,362.1."

"The group's seasonally adjusted purchase mortgage index was nearly unchanged at 395.6 from the preceding week's 395.5 figure."

"However, the purchase index--considered a timely gauge of U.S. home sales--was substantially below its year-ago level of 479.3."

Gen-X Not Planning For Retirement

From Marketwatch:

Retirement outlook? Poor

"Generation Xers will be worse off even than the baby boomers when retirement looms unless they make inroads into retirement savings by working longer and saving more, according to a new report."

"The study's authors created a model for the optimal percentage of preretirement income people need, and projected what different household types would actually have, based on the Federal Reserve Board's survey of consumer finances, and other data. The study said retirement households need to produce 73% of preretirement income to meet the standard."

"The study projects that Generation Xers will build wealth at the same rate as earlier generations, but 'what they don't have is the same kind of Social Security benefits coming their way, and they are a cohort relying almost entirely on 401(k) plans rather than having any money from defined-benefit plans,' said Alicia Munnell, co-author of the report and director of the Center for Retirement Research, in a telephone conference."

"Still, the outlook even for older generations is not good."

"Overall, 'a large number of households are at risk,' she said. 'To avoid having a big decline in the standard of living at retirement, they're going to have to do something. The two obvious things to do are to either work longer or save more,' she said.

"While Gen Xers appear to be worse off, they also have a clear means for improving their outlook: Increase savings. Pushing their savings rate just 3% higher would mean that the portion of Generation Xers missing their retirement income target by 10% or more drops to 38% from 49%."

"For the early boomer group, just 32% fall short on retirement income, down from 35% now, if they increase their savings rate by 3%. And 38% of late boomers miss income targets, down from 44% now, if that group ups their savings by 3% a year."

The full paper can be found here:


Property Tax Relief For NJ?

From the AP:

Property tax relief by year’s end?

"Assembly Speaker Joseph Roberts Jr. and Senate President Richard Codey said they’ll ask Gov. Jon Corzine to address a rare summer session of the Legislature in July in which the Assembly and Senate will also form committees tasked with coming up with ways to control government spending and lessen the need for property taxes."

"The lawmakers said they want reform bills signed into law by the end of the year. An exact timeline for the July session has not been set."

"The state relies heavily on local property taxes to pay for county and municipal government and school operations, but property taxes have risen about 7 percent annually in recent years and hit low and middle-income households hardest."

"Business leaders, who have been opposed to cutting property taxes by collecting more in other areas such as corporate taxes, were enthused."

"'We’re pleased the real issue in property taxes -- that is government spending -- is finally being focused on,' said Art Maurice of the New Jersey Business & Industry Association."

The areas to be explored:

- Whether the state needs to change how it funds schools and tackle disparities between funding for urban, suburban and rural schools.

- How to end alleged abuses within the public employee pension system that costs state and local governments billions of dollars annually.

- How to make it easier for local governments to consolidate and share services.

- What constitutional changes may be needed to change how taxes are collected, including whether the state needs to shift more emphasis to income and sales taxes and whether citizens should be allowed to convene a special convention to change the state constitution.

Dwek Liquidation Begins

From the Asbury Park Press:

Agent says claims against Dwek now top $310 million

"Vacant land and underperforming commercial properties owned by Solomon Dwek should be put up for sale immediately, the court-appointed lawyer examining Dwek's real estate empire recommended Tuesday."

"Fiscal agent Donald M. Lomurro said he has now received more than $310 million in claims against Dwek, who owns or has an interest in more than 350 properties in New Jersey and elsewhere, Lomurro wrote in a report to Superior Court Judge Alexander D. Lehrer, here."

"The recommendation to find buyers for the properties is an effort to generate income to pay creditors, including some who claim they gave Dwek tens of millions of dollars to invest in properties over the past two years."

"Among Dwek's properties, 46 development projects need either municipal or state approvals, Lomurro said. They range from condominiums in Bradley Beach to a marina in Dover Township."

"Lomurro said he has received 70 appraisals on Dwek's various properties, which are consistent with the prices Dwek paid for the land. Fourteen offers for various Dwek properties are greater than what Dwek paid for them."

"Such offers are "encouraging," Lomurro wrote to the judge."

Tuesday, June 06, 2006

Bread and Circuses

From the Daily Reckoning:

The Greater Depression
by Doug Casey

"We don’t know what this portends, but yesterday Ben Bernanke slouched over to Congress. He must have worn lifts. For somehow, he managed to remind the world of old Paul Volcker. We remember when the giant Paul walked the earth over at the Fed. It was a different world back then, with consumer prices rising at double-digit rates and interest rates over 15%. But Volcker stood up and did what a Fed chief is supposed to do he stopped inflation."

"Even recently, speaking to an audience that included an intrepid reporter for The Daily Reckoning, Volcker said he was surprised the country had gotten away with such a long period of credit expansion...without setting off a new round of consumer price inflation. He wondered out loud how it came about and when it might end. But he, like the rest of us, had no sure answer."

“'Liquidity surged in the past decade, fueled by relaxed monetary policies of central banks, globalization, new technologies and such exotic financial instruments as derivatives. They in turn drove down interest rates and bond yields and encouraged investors to pump more money into riskier assets, propelling stock markets.'”

"If we are right, asset prices are going down no matter how much financial hygiene you practice. And it will mean, among other things, fewer Fed chiefs on the cover of Time magazine and fewer U.S. Treasury secretaries from Goldman Sachs. Speculation will cease to pay. In fact, maybe our next U.S. Treasury secretary will come from the legal profession, where he will have made his reputation in Chapters seven and 11."

"It was cheap money, as well, that fueled America’s property bubble. Now, that bubble seems to be losing gas."

"And thus we see, dear reader, something interesting. Inflation may be ‘unwelcome' in the dewy eyes of the economics professor who now rules the Fed, but the lack of it is terrifying to the wide open peepers of Speculation Nation."

"But all of America is now highly dependent on easy money. The U.S. government relies upon it to pay for its bread and circuses. Wall Street needs it to keep stock and bond prices elevated. The lumpen need it, too; their house prices will fall without it. And when housing falls, the whole kit and kaboodle comes down with it. The U.S. economy will be in recession within six months"

National Association of Realtors - "parts of the housing market are 'vulnerable'"

From Reuters:

Realtors see lower US home sales

"The National Association of Realtors on Tuesday lowered its forecast for U.S. home sales in 2006 and called on the Federal Reserve to stop raising interest rates because parts of the housing market are 'vulnerable.'"

"'Experiencing a slowing from a hot market is a good thing because we need a solid housing sector to provide an underlying base to the economy, and slower appreciation will help to preserve long-term affordability,' said David Lereah, the group's chief economist."

"The trade group, in its monthly forecast, said sales of existing homes should fall 6.8 percent to 6.60 million this year from the 2005 record of 7.08 million. Sales of new homes should decline 13.4 percent to 1.11 million from a record 1.28 million in 2005."

"That is below the group's earlier forecast of 6.62 million existing home sales and 1.13 million new homes sales in 2006."

"The Realtors said housing starts should fall 6.2 percent to 1.94 million in 2006 from 2.07 million last year."

"The Realtors said the 30-year fixed-rate mortgage should average 6.9 percent during the second half of the year. The national median existing-home price for all housing types is forecast to rise 5.3 percent to $231,300."

Jersey Unsold Homes Up 71%

Nothing that you didn't already know from reading the blog yesterday. From the Herald/Record:

Supply of unsold homes up 71 percent in a year across N.J.

"Buying a house in New Jersey this spring? You've got a lot more choices than buyers have had in recent years, according to a new report from an appraiser who tracks the housing market."

"The inventory of unsold homes was up 71 percent in April compared with April 2005, according to Jeffrey G. Otteau, an East Brunswick appraiser."

"While buyers used to bid against each other for houses, now sellers are 'in a scramble to gain the interest of buyers,' Otteau wrote in his latest report, which was released Monday. The report echoed his findings for the first quarter."

"Sales contracts in April ran 20 percent below the April 2005 level, and there is now a seven-month supply of houses for sale in the state, up from a three-month supply in the spring of '05."

"The most expensive houses sit on the market the longest. A house costing more than $1 million is likely to be on the market for an average of 12 months in Bergen County, 24 months in Passaic County, 11 months in Morris County and 40 months -- more than three years -- in Hudson, Otteau estimated. Those estimates are based on the supply of houses for sale in that price range."

"There is about a six-month supply of houses under $600,000 for sale in North Jersey, Otteau said."

Pimco's Keisel Cashes Out

Great piece over at Pimco by Mark Kiesel:

U.S. Credit Perspectives

"Three weeks ago my wife, Amy, and I sold our house and moved into a rental apartment. I believe the U.S. housing market is set to cool given the current level of prices and fundamental trends. Recent price gains have likely come primarily from rising speculation and “creative financing” because affordability is declining and inventories are rising. When asset prices diverge from fundamentals, I favor taking the other side of the trade – even if it involves moving. Amy wasn’t thrilled about moving, but my sense is she will look back on our sale and view it as a good one. In the end, the fundamentals should win out."

"The U.S. housing market is turning for the worse and housing price gains are set to moderate. What does housing have to do with corporate bonds? Plenty. Rising home prices have been a key driver of U.S. economic growth, which in turn has played a major role in the tightening of corporate bond spreads. In other words, housing will foreshadow not only the direction of the economy, but also the direction of credit spreads. As the housing market turns, consumers will pull back their spending and the U.S. economy should slow. With a softening housing market, we should expect tighter lending standards, a moderation in the willingness to take risk, a slowdown in the pace of asset price appreciation, less liquid markets, and rising volatility in financial markets. And at that point, “for sale” will not just be a sign you see in front of your neighbor’s yard – investors may also put a “for sale” sign on risk assets as well. Investors in the credit market should therefore remain cautious given the tight overall level of corporate bond spreads and focus on developments in the housing market."

"Housing is a leading indicator of the overall direction of the economy. As housing slows, economic growth will surely follow. As such, we should expect to see tighter terms on credit extension, less liquid markets and a pick-up in the overall corporate default rate over time with a slowdown in the pace of economic growth. An eventual rise in the default rate, combined with higher near-term volatility, should lead to a more challenging market environment for credit. Watch the “for sale” signs – in both the housing and corporate bond market – my sense is more of both are coming as the market transitions from a mode of risk taking to that of risk aversion."

Will Spring Street Redevelopment Be Affordable?

From the Daily Record:

Developers questioned about Morristown housing

"Developers appointed by the town to redevelop about half of Spring Street faced a string of tough questions from a crowd of about 100 at a Monday night meeting at Union Baptist Church."

"'How many of (the housing units) are affordable?,' one woman asked and set the tone for the meeting."

"Anthony Scotto, of Scotto Properties and Villa Enterprises, the developer selected to perform the redevelopment by the town, and architect Allen Kopelson answered questions and listened to feedback."

"Scotto and Kopelson said they were committed to meeting the state requirement of providing one affordable housing unit per every eight market rate units in the 278-unit development."

"Mayor Donald Cresitello said that the town is seeking to demand that developers make 20 percent of their redevelopment projects affordable housing, where the state only requires 11 percent."

"Cresitello said that because the town did not address its affordable housing requirements in previous years, the town is currently trying to meet its requirement of 300 units, as well as another 250 units anticipated in the next four years."

High Bridge Loses - Mt. Laurel Agreement Powerful Medicine

From the Star Ledger:

High Bridge loses bid to block housing development

"A state appeals court yesterday rejected High Bridge's attempt to block a long-approved 170-unit housing development by removing it from the borough's affordable housing plan."

"The three-judge panel noted that the latest legal dispute was part of years of 'stalling tactics' by High Bridge officials to stop local resident Pat Catanzareti from building on the 34-acre property through a contract with developer Pizzo and Pizzo."

"The dispute over the property off Dewey Avenue began in 1984, when Catanzareti sued High Bridge under the state Supreme Court's Mount Laurel doctrine that requires towns to provide housing for low- and moderate-income residents."

"The state Council on Affordable Housing, or COAH, mediated a settlement in 1988, allowing Catanzareti to build 170 units, including 34 affordable homes. Over the years, though, High Bridge sought to modify or overturn the agreement, and the affordable units were never built."

"Mayor Al Schweikert said High Bridge would continue its efforts to acquire the 34-acre property, either through negotiation or condemnation. The borough has hired two appraisers, whose evaluations are expected at any time, he said."

Can Eminent Domain Be Fixed?

From the Star Ledger:

Eminent domain reform bill stirs Assembly debate

"A reform bill designed to end eminent domain abuse got a decidedly mixed reaction yesterday, with critics saying it wouldn't stop municipal officials and developers from running roughshod over property owners."

"The bill, sponsored by Assemblyman John Burzichelli (D-Gloucester), would require a more public process for declaring areas "in need of redevelopment" and place limits on how much property could be pulled into such a zone."

"Critics claim that some New Jersey towns have abused the long-standing right to seize blighted property for redevelopment, instead handing thriving businesses and perfectly good homes to politically connected, private developers."

"But others said more substantive reform is needed."

"'New Jersey gets a nod for trying, but given the fact it has been such a major abuser, it will need a lot more reform than you've just described,' said Steve Anderson of the Institute for Justice, a Washington, D.C.-based nonprofit group that has opposes eminent domain for private development."

"The reform bill -- which could be voted out of committee as early as Monday -- would require towns to find displaced homeowners a new house near the redevelopment zone."

Monday, June 05, 2006

The Otteau Report - May 2006


"The New Jersey housing market took a sharp turn for the worse in April as contract-sales activity declined 11% from the prior month and ran 20% below the April 2005 level. At the same time, the inventory of unsold homes on the market increased by nearly 6,000 homes in April and now stands 71% higher than a year ago. That this deterioration comes in the midst of the prime spring selling season when home sales would normally be accelerating provides solid confirmation that the transition to a buyer-controlled market is now complete."

"Different from one year ago when buyers were competing with each other by increasing their offering prices, it is now the sellers who find themselves in a scramble to gain the interest of buyers. In most cases, that will require a reduction in asking price to recapture the lost sense-of-urgency which dissipated once inventory increased and home prices ceased their upward spiral."

"In examining the market from the perspective of price levels, there are significant disparities. The unsold inventory of homes on the market presently accounts for a 7-month supply (up from 3-months one year ago). This supply is however less for lower priced homes as demonstrated in the table at right (6-months below $600k, 10-months between $600k-$1-million, and 14-months above $1-million). The weakness in the market in excess of $1-million is likely to worsen in coming years due to a combination of economic and demographic trends which will further disadvantage the luxury home market in New Jersey."

Source: The Otteau Group,

Joey's Condo Plan Falls Through

I'm sure everyone here is going to be excited by the news that Joey's will remain open, and is not going condo. Dust off that IROC, get some new muscle-tees, and spike that hair up high, because summer is comin' quick! I can almost hear the 'thumpin' now!

From the Asbury Park Press:
Surf Club's new life has boss stoked

"Joseph Barcellona Jr. wants everyone to know that Joey Harrison's Surf Club is open for business."

"And it's likely to stay that way."

"That's good news to the Surf Club's thousands of summer patrons, who feared the venue would close forever after the Dover Township Planning Board approved a plan to convert the property into 28 luxury townhouses last year."

"But Barcellona said that plan has since stalled, and he does not believe the club will be sold anytime soon. So the music will go on this summer at the club, which will be open seven days and seven nights a week starting June 23."

"The beachfront club has coexisted with the residential neighborhood for at least 60 years. Beachfront bars, once common in the area, have been steadily disappearing over the past two decades, victims of a soaring real estate market and a less tolerant populace."

"The Tradewinds Nightclub, located next to the Sea Bright seawall, shut down in 2003 and was replaced by luxury oceanfront homes."

Longer Term Mortgages A Bad Deal

From the AP via the Star Ledger:

Longer-term mortgages offer more pitfalls than benefits
By Eileen Powell

"When it comes to home mortgages, some people are thinking really long term by taking 40-year or 45-year -- or even 50-year -- loans."

"The attraction is lower monthly payments, which make these mort gages more manageable for some families. The disadvantage is that consumers can end up paying much more interest over the life of the loan than they would with a traditional 30-year mortgage."

"Some housing experts are skeptical the 40- to 50-year mortgages will be widely used."

"Keith Gumbinger, vice president of HSH Associates, a mortgage information service based in Pompton Plains, said 40-year mortgages have come in and out of favor, last gaining some popularity in the mid-1980s when interest rates were so high many consumers didn't qualify for loans."

"The major drawback of the longer-term mortgages, he believes, is that 'equity builds extremely slowly' so that there's little advantage compared with interest-only loans."

"For comparison purposes, Gumbinger calculated the cost of mortgages of various lengths with a fixed rate of interest: On a $275,000 mortgage for 30 years at a fixed rate of 6.75 percent, a consumer would make monthly payments of $1,783.64 and pay $367,112 in interest over the life of the loan. That same mortgage at the likely higher rate of 7 percent for a 40-year term would require monthly payments of $1,708.93 and result in $545,290 in interest. At 7.25 percent for 50 years, monthly payments would be $1,707.45 and total interest would be $749,476."

"All of these mortgages, he noted, appeal to many of today's buyers "because they look at monthly payment and cash flow as their only objective" when selecting a mortgage."

Sunday, June 04, 2006

Weekend Open Discussion

Observations about your local areas, comments on news stories or the New Jersey housing bubble, Open House reports, etc. If you have any questions you wanted to ask earlier in the week but never posted them up, let's have them.

For readers that have never commented, there is a small link on the bottom of each new message that reads "# Comments". Go ahead and give that a click, you might be missing out on a world of information you didn't know about. While you are there, introduce yourselves to everyone.

For new readers that have only read the messages displayed on the main page, take a look through the archives, a substantial amount of information has been put online in the past 6 months. The archives can be found at the bottom of the right hand menu and are categorized by month.

As always, anything goes!

Good Bye Wildwood

From the AP:

Building wave claims Jersey shore motels

"The Lollipop and the StarLux. The Shalimar and the Caribbean. The Imperial 500 and the Tangiers."

"With garish neon signs, multicolored exteriors and sweeping deck overhangs, the 'Doo Wop' motels of the Wildwoods are the architectural equivalents of a Vitalis-slicked pompadour."

"They, too, are fading into the past."

"One by one, the mom-and-pop motels are being razed, rendered economically obsolete by a real estate boom that has made the land underneath too valuable to support a couple of dozen $100-a-night rooms."

"More than 50 of the motels have been demolished in the past three years, giving way to pricey condominiums with none of the charm - or history."

"Built in the 1950s and 1960s and dubbed 'Doo Wop' after the vocal style of the period, the motels sprung up next to the ocean in Wildwood, North Wildwood and Wildwood Crest, catering to a booming postwar America that wanted vacation places with outdoor pools, parking spaces and easy ocean access."

More information can be found on the National Trust for Historic Preservation Website:

Doo Wop Motels

"'The exuberant architecture of the Wildwood Doo Wop motels makes them irreplaceable icons of popular culture,' said Richard Moe, president of the National Trust for Historic Preservation. 'Instead of being demolished to make room for nondescript new development, the Doo Wop motels should be preserved as the focus of an all-season resort and a vibrant, livable community for year-round residents.'

Caveat Emptor!

If the gremlins wreak havok, all bets are off.

From the Asbury Park Press:

Real estate "bubble" might not be so thin

"Those of us who are bears on the housing market may be growling needlessly when it comes to irrational exuberance in the hottest areas."

"Maybe we're looking at traditional gauges in the wrong way, and there is indeed a "very orderly and moderate kind of cooling" going on and there won't be a huge crash in prices, as suggested by Federal Reserve Chairman Ben Bernanke on May 18."

"Proponents of the bubble theory claim that home prices in the most torrid markets — Boston, California, coastal Florida, Las Vegas and New York City — are inflated because they are outpacing personal-income growth."

"If this theory is correct, then the mass, herdlike psychology of a bubble keeps prices artificially high because buyers are willing to pay ever-loftier, unsustainable prices based on the myth of indefinite future appreciation."

"To gain some perspective, the researchers looked at housing data in various markets going back 25 years. While they concluded that Boston, Los Angeles, New York City and San Francisco were overvalued in the late 1980s — leading to price declines — they see prices in those cities as "reasonable" now."

"'Of course, just because the data does not indicate bubbles in most cities does not mean that prices cannot fall,' they add."

"Some 25 million home buyers have been priced out of the market due to recent increases in 30-year mortgage rates from the 6 percent to 6.5 percent range, according to the homebuilders association. About 1 million buyers drop out of the market for every quarter-percentage-point increase."

"Whether there's a bubble in the most overheated markets may be a moot point. The combination of house affordability and the health of local economies will decide the fate of real estate. If these gremlins wreak havoc, all bets are off."