HMS Associates

With 2008 gone by now, all we can only say Good Riddance!  Beginning with the stock market having its worst year since the 1930’s.  What started as we know it with a sub prime crisis, quickly deteriorated to a total mess in the mortgage industry. Not to mention the high gas prices reaching almost $4.00 a gallon and Crude oil reaching nearly $140.00. With the major banks like Lehman brothers and Bear Sterns going out of business or being bailed out. People losing their life savings or their pension plans which were wiped out together with these big icons. Then we saw the the real estate values plummeting across the country by 12% up to 30% in some cities. In a society where people looked at their home as an ATM machine the results were devastating. Soon eateries and retailers started feeling the pinch. With retailers and eateries going out of business along with banks shutting down, that put back on the market thousand of square feet of office and retail space.  The Real Estate market in Manhattan which has thus far defied the national trend of declining markets suddenly didn’t look so invincible. Next came the auto crisis with Ford, GM and Chrysler begging Uncle Sam for a bailout. If in the beginning of the year people weren’t sure if we are in a slow down economy or that the markets are just correcting themselves….. At the time the ball dropped in Times Square on New Years Eve, everyone admitted the unfortunate truth that we are in the midst of a Recession, with some making the argument that we are in the midst of a depression or heading there.

Ok, enough with that, now I’m going to give you some good reasons to be optimistic. First of all the economy is a cycle with ups and downs. After each up market comes a down market and vice versa. The new administration is reportedly proposing a very aggressive stimulus plan over the next two years which could be as large as $775 billion and include infrastructure investments and up to $300 billion in tax cuts.  Currently interest rates are at a all time low. The Real Estate Market will hopefully bottom out by mid year which at that point property values will hopefully start going up. The government already approved loans for the auto industry which means that auto loans will be available for consumers. Most of the Mortgage junk has been flushed out already along with the government bailout plans. With all said we can expect the economy to grow and be more prosperous in the second half of 2009. Lets hope.

As reported yesterday the numbers are looking even worse then we could have expected.  Unless you’re a buyer who’se in good financial shape there are very few positives that are coming out of these recent news cycles. A drop of 13 percent in the average sale price for homes around the country is a deeply disturbing trend and we’re fairly convinced that the end of this misery is nowhere in site. We will report here our annual Brooklyn Market Report in mid January of the New year.

The commercial real estate market has become the latest industry to begin actively seeking out help from the federal government according to this report in the Washington Post.

Here’s something to consider. We are all hearing the bleak news about property values declining. Here’s a tip of on making the most of the situation. 

File for a tax assessment appeal. What does that mean? Let me explain: Tax assessments are calculated from property values that may have been recorded some time ago, when it is possible property values were considerably higher depending on the property and when it was assessed. The lag between the current market value and the value at the time of assessment could mean a higher tax burden than is warranted. A tax appeal can remedy the situation, and a professional appraisal could determine whether an appeal is warranted.

The deadline for filing an appeal with the Tax Commission in New York City is March 1st and requires the applicant to indicate how much he/she thinks the property is currently worth. Media reports indicate dramatic increases in the number of tax appeals being filed in municipalities across the country. check back to my site. I will be adding links for various counties in the metro NY area with information on how to appeal process works in their counties.

So I had initially said that I would shy away somewhat from the Madoff story and try to remain focused on the issues that affect those of us who don’t yet have 100 million dollars to invest.  Yet, each day I’m realizing that this is a crime which has the potential to negatively impact upon almost all of us in some way.  For some it will be direct and irreversible harm.  Take for example, those people who went to sleep on Wednesday evening in ignorant bliss thinking they were worth tens of millions of dollars and the biggest concern was which model yacht would most impress the neighbors.  Within a day, some of these people were literally destitute and were heading for pawn shops, their wife’s jewels in hand.

These are scenes that we would never have thought possible in 21st Century America.  That someone at such a high level could be free to carry out such a harmful level of deciept is shocking.

Even in what’s been an incredibly volatile and mostly distressing financial year, the last few days can only be described as whirlwind and completetly sensational.  The news about Bernard Madoff was without exageration one of the most astounding stories ever to come out of Wall Street.  The fact that he was a thief is not the surprising part.  We’ve seen thieves of all shapes and sizes before but what is shocking is who he was stealing from.  As is indicated in this Reuters report, there are likely to be staggering losses of hundreds of millions of dollars, if not more, to many different charities.  The point here is that when people read about the theft and deciept of Madoff, they shouldn’t be under the impression that he was a Robin Hood figure who was simply stealing from the rich.  Rather his crimes will extend way down the line to deprive soup kitchens, hospitals, research programs, schools and hundreds of other insitutions will be permanent.

In partial interest ownership of real property, determining minority discounts is an important matter for the purposes of estate planning, real estate taxes, the re-sale process or any other transfer of the property in question. Minority discounts vary greatly depending on numerous factors, and must stand up under great scrutiny, making the process all the more crucial. This article prepared by by myself together with Gerald H. Morganstern exclusively for the NY Law Journal provides an overview of minority discounts and describes the commonly applied technique used in determining minority discounts. Click here to see the full  article.

So I am going to take the liberty of diverting slightly from our usual focus on issues of economy and real estate to take a brief look at the topic that is all over the front pages today- that of the corruption allegations being launched against the Governor of Illinois.  Take a look at this New York Times graphic and the related stories to get a better idea of what is going.

Basically, it appears that Illinois politics which is known to be typically dirty and no stranger to corruption has crossed lines that are more associated with the Third World and backalleys of places like Eastern Europe than what we usually think of when it comes to American governance.  The Governor allegedly- and yes we know innocent until proven guilty…- was trying to sell for amounts of up to $500,000 the Senate seat of president-elect Obama.  According to Illinois law, the Governor assumes sole responsibility for. See also a video clip from MSNBC about Gov. Blagojevich defiantly clings to power.

So over the weekend we were subjected to the news of the latest employment numbers (or unemployment for that matter) which came out and were even worse than most analysts could have projected. 

As reported in The New York Times some 533,000 people lost their jobs in recent weeks making it the most costly month for employment in 34 years.  These numbers, which were higher than what were previously expected, are sure to have devastating implications for a wide variety of economic sectors, including the retails markets and undoubtedly real estate of all types. 

When we see these devastating numbers, the natural inclination is to ask just how much worse can it possibly get.  And perhaps herein we can find some rays of optimism because if it things aren’t going further downhill…they have to begin to get better.

Maybe it’s a stretch to say that this approach can be a source of real hope but perhaps history is on our side.  In efforts to find those rays of sunshine in this ever darkening storm of depression, I came across an article from the Israel daily, Maariv that essentially says that when such awful employment numbers have been produce it would indicate that things have to start reversing themselves. 

Among the various commentators this Hebrew language article quotes is Jim Cramer of CNBC who believes that there might be some silver linings that could come out of the holiday season.  Pointing to things like the low cost of oil, Cramer says this will translate to more driving and lower home heating bills.  Shrinking interest rates hope to entice homebuyers as well. 

There’s no doubt that in pretty much every business sector, whether you’re looking to travel, purchase new appliances, move or any of hundreds of other places buyers put their money nowadays, things are on the side of the purchaser- assuming he or she has the cash to afford those lower prices. 

I would contend that a large factor in these downward spirals is how it’s all driven by fear- even if it’s legitimate fear.  People stop spending because the media and other public institutions are telling them to conserve and that the period ahead requires us all to save.  That sentiment, while to a large degree accurate, needs to be reassessed at some point when we’re convinced that things can’t get any worse. 

Once we’re told and reassured that we’ve hit rock bottom, people will work to seize the day and perhaps begin injecting the necessary capital back into the economy and start the spiral heading in the other-more positive- direction.

Perhaps it’s naive to think we’re at that point…perhaps not.  Only time will tell.

When the holiday season approaches each year, what most executives get to thinking about his how they’ll be spending their bonuses.  In recent years, top execs from places like Goldman Sachs were earning bonuses in the tens of millions of dollars, fueling spending booms that benefited a wide variety of business sectors, including the luxury real estate market.

This year, as we know all too well, many executives will be lucky if they get any bonuses at all.  President Elect Obama was reported by Reuters to be encouraging top company heads to forego any types of additional payments because of the economic climate.  “I think that if you are already worth tens of millions of dollars, and you are  having to lay off workers, the least you can do is say, I’m willing to make some sacrifice as well,” Obama said.  Regardless of what one might have thought about Obama during the campaign, it’s hard to disagree with a statement like that.
AIG for one may seem to be heading the call When the holiday season approaches each year, what most executives get to thinking about his how they’ll be.  However, this seems to be somewhat an issue of semantics with bonuses being replaced with “retention” payments sometimes amounting to as much as $3,000,000 for some of the bigger names in the firm.  AIG is trying to defend this move saying that they need to provide these incentives in order to hold onto their top people so that company’s value stays up for potential buyers or AIG affiliates many or which are on the market.  But truth be told, this is a shallow argument which leaves a bitter taste in the mouths of all those for whom even a modest bonus won’t be coming anytime soon.

I was quoted in an article in the Real Deal that  discusses the effect the shortage of bonuses will have on luxury home sales and there’s no doubt that it’s gonna be a depressing reality for owners and brokers.  As the article details, potential buyers are more likely to be potential renters in luxury areas like Midtown Manhattan.  Just another dark note on what is usually a cheery time of year.  But let’s be optimists and point out that we still have a couple weeks to go before Christmas and Chanukah for some points of light to emerge.

A lot is certainly going on these days yet most of the talk is on massive bailouts and huge banks going under and oil prices.  What we sometimes forget (although looking at our portfolios we are soon reminded) is that beneath those trillion dollars of losses are the little people- namely us.

So let’s take a look at a more concise breakdown of where things stand at the moment from the various angles of where things are going for the “you and me consumer”:

The dust hasn’t yet settled on the auto bailout and we are already hearing of another possible bailout this time it is the giant Citigroup which have lost 60% of their value recently as a result of anxious investors.

The unemployment rate is expected  to hit 7.5% by the end of the new year.  That’s a full percent higher than the October 2008 6.5%.

Restaurants are having trouble as well as people are either seeking out inexpensive eateries or they’re ordering less at the up scale places.

Supermarkets are reporting a 100% increase in Credit card payments and at the same time they have seen a 10% decrease in sales.

To see how far consumers are cutting back on spending see the CNBC report on how bad the shopping season has been thus far for the larger retail stores. They are reporting a decrease of more then 20% in sales which is forcing the retailers to reduce their prices sharply.

Retail vacancies are up and many retail tenants are behind with more then 3 months of rent.

The Holiday season is around the corner and there are lots of gifts and toys tied up in China, not being released due the credit crisis. The banks are not giving the LC’s.

As the conventional financing disappeared hard money loans started to fill in the gap and became very popular. Hard money loans also known as private mortgages can be very expensive money as rates range from 11% - 17% in addition to some points paid upfront. These type of loans are generally intended for short term as a bridge loan until the investors can arrange long term financing or a construction loan. With the freeze of the credit markets a lot of these hard money loans are about to expire and we may see an increase in defaults as the borrowers can’t get other means of finance for their projects.

For all the bad news swirling around us, let’s take a look at the positive for a moment:

President elect Obama came up with a plan to create 2.5 million jobs over the next two years.

I’d say that’s pretty good news.  Perhaps he can turn this whole country around.  We are in desperate need of some change.

The President Elect has not officially announced his Treasury secretary yet, but it seems he has already picked someone for this position.  According to an anonymous Democratic aide, Obama will likely appoint head of the Federal Reserve Bank Timothy Geithner for this role.  Additionally, Lawrence Summers, Clinton’s former Treasury chief, is expected to gain a senior White House position. 

What does all this mean?

Barack Obama is thinking ahead.  He sees the current state of the economy and knows he’ll need experienced staff to help the country get through these rough times.

But what about his overused message of change?

This does not give the impression of a dramatic change, but perhaps that is a good thing.  Read this about Obama’s picks in order to understand the deeper meanings behind it. 

I personally feel the President Elect is acting in a most responsible manner.  He is seeking out the best people to help guide him on his mission of turning around the economy.  Obama knows he’ll need all the help he can get.

To learn more about both Geithner and Summers read this  on their experiences in their related fields. 

What do these decisions have to do with NYC real estate?  Well, I like to believe that the better the financial state of the nation, the better off our city is, the better off the housing market is.  We are all looking towards the next president to help get us out of this mess.  Maybe his advisors can help him help us.

Below please find a summary of a news release that HMS put out today.  Your thoughts are welcome as always on a topic that has all of the local market talking:

As the average Brooklyn home price dropped two percent to $695,285 in the third quarter of 2008 from $708,457 in 2007, it has become a buyer’s market, with more inventory out there and sellers being forced to bring prices down to get property to move. This does not downplay the difficulty of getting financing in this tighter credit market, but if a property is priced well and the buyer has good credit and a decent income, the market right now favors the buyer.
The number of Brooklyn properties sold rose one percent from 988 to 999.
The two percent price drop in Brooklyn in the third quarter compares with an eight percent rise in the second quarter of ‘08 and a three percent increase in the first quarter of this year.

While the average price boroughwide dropped two percent, neighborhood by neighborhood sale prices varied. They were up in Brooklyn Heights and Prospect Heights but fell in Sheepshead Bay, Greenpoint, and Park Slope.  The number of homes sold rose in Carroll Gardens, Williamsburg, and Marine Park but dropped substantially in Greenpoint, Fort Greene, and Brooklyn Heights.
In three neighborhoods not included in the study, Bedford-Stuyvesant, East New York, and Brownsville, site of numerous apparent turnovers, flips, and subprime loans, the picture was bleaker.  Here there was a 50 percent decline in housing sales during a recent six-month period because of tighter lending standards.  A recent CNN/Money report named Bed-Stuy as among neighborhoods with the highest foreclosure rate nationally.
Single family home prices across all neighborhoods studied fell from $738,000 to $734,000, four-family homes rose from $1,212,000 to $1,423,000, co-ops fell from $557,000 to $492,000, while condos were up from $657,000 to $687,000.
What’s happening in Brooklyn reflects the Manhattan market.  Wall Street layoffs and smaller year-end bonuses are having an impact on the Manhattan market, and that means Brooklyn prices will continue to come down as well. You’ll have fewer Manhattan clientele coming to Brooklyn because Manhattan prices are lower too.

I wanted to call your attention to a fascinating article from the New York Times that uses the case study of one particular building in midtown to demonstrate how the current crisis is affecting the local market.  It includes a nice graphic (if nice is the proper word to describe such a depressing topic) that illustrates what we’re dealing with. 

On the more optimistic front, an MSNBC report did describe New York as having the ability to remain strong overall,  and that falling rents could actually make the city a more livable place to live.  Of course this might benefit the overall living situation, but landlords are unlikely to be overly happy with this assessment.  Interestingly the piece pointed to Seattle as the leading city for real estate investment at the moment. 

As a locale that has an international feel and the presence of some major corporations like Boeing and Microsoft, it does have a lot to offer.  New York made it into the top five and in terms of the bigger picture of what a city can offer, beyond just bottom line considerations, you could argue that we should retain the advantage of pretty much any other place in the US and certainly on the East Coast.

Going from the serious to the more ridiculous for just a moment, I’ll point you in the direction of The New York Observer where a column comically argues that high end divorces could be the rescue that the local real estate market needs.  Referencing settlements like that of Heather Mills, the ex-wife of Paul McCartney, that resulted in a $5million midtown home purchase, this piece is just one more possible source of optimism.  Writing only slightly tongue in cheek, the author concludes, “This is all very encouraging, really. After all, even as the real estate market collapses, there will always be divorces, and therefore angry ex-wives eager to spend their settlements on amazing New York real estate.”

So now we’re looking at the potential for another government bailout this time of the auto industry.  Now there can be no disputing the central role that automobiles play both in our national and cultural psyche as well as the obvious economic importance of the industry.  The question however is just how much do we as a nation need to do to protect the interests of our private industries?

In this posting I’ll take a look at some items that take various positions on this issue and I urge you to share your thoughts by sending in your comments. This Central Blog has views from two bloggers who present various different perspectives that range from the bailout being futile to necessary but makes clear that there’s little consensus amongst politicians, economists or even us the consumer as to what will work best for our long term economic health.

I also found this Business Report a helpful analysis of the bigger picture and working to give an understanding of how this issue can affect the broader economic outlook.  Political obstacles also stand in the way of getting this bailout approved with Democrats on the one hand willing to do a whole lot to help the auto industry and the Republicans looking at the situation far more conservatively so it’s far from a done deal- at least not in the current climate.

The question that we all need to think about is what precedent are we creating by approving all these bailouts.  Are we stating that private industry deserves the protection of Big Brother, the federal government, regardless of whose fault it is for getting them into that mess?  Or to we favor truly free market economies where companies need to be held responsible for their failures and won’t be able to rely on us the taxpayer to bail them out.  It’s an extremely difficult question that is being asked on ways like never before in our nation’s history but the decision the country makes is certain to have ramifications not just in the short term but for many years to come.

So the big day is now behind us and we can begin to move ahead to the task at hand… actually confronting the many problems facing this nation and the world.  So we need to return to our focus on the local scene and the New York Real Estate market.

There actually is some good news but it very much favors the buyers and that is that the experts are coming out and saying now is the time to purchase.  An article in Forbes calls our times “unprecedented” with price declines like we’ve never seen before.  The article probes the opinions of four experts and they all pretty much voice a common view that now is the time to buy.

The problem of course is that unless you are independently wealthy, securing financing is a real challenge.  For all the obvious reasons, mortgage bankers are not willing to make the mistakes of the past. It’s a nice long piece that has the experts battling out what they think are the best moves at the moment but the bottom line is they say if you’re in a position to do so, there’s never been a better time to buy, buy, buy (real estate that is) than now.  I’d welcome your comments on this.

On the very local level, Reuters is reporting that landlords in the commercial markets are slashing prices.  The exception is the high traffic areas in mid-town where we are going to have to wait until after the holiday period to see how consumer sales go.

Our local markets are also finding the need to find innovative ways to woo international investors as reported in the International Herald Tribune. Property owners are making aggressive efforts to market themselves to Russian and Eastern European oligarchs including advertisements in their native tongues.  If successful, combined with the low prices, we’re likely to see an even more international flavor than in the past in the local ownership scene.

In light of all the pessimistic talk of the mainstream media, I would like to put things into perspective. Let’s start with the economy. If we were listen to the major media outlets one could think that the stock market will never recover or that the dollar will keep on falling forever. In reality, everyone knows that we find ourselves in what can best be described as a cycle and we will survive this just like we survived recessions and depressions in the past. 1929- 1930’s, Post World War 2, the 1987 crash, the 1990’s and so on and so forth…. Lets take a look at a couple of things that the media predicted in the last few months, what they said would happen and then what really happened.

1. The Japanese stock market (The Nikkei 225)
2. Gold
3. US Dollar
4. Crude oil
5. Gasoline
6. And of course we will watch the upcoming elections in less then 48 hours……..

The Japanese stock market was down by 53% two months ago. People likely thought they’d never see the market recover.Then came October and the Japanese stock market jumped with 36%

The media predicted that gold would pass the $1,000 per oz. threshold when it was in the $900’s at its peak. In October gold was at $700 a oz.

The dollar was up by 8% in October. The biggest gain in one month since 1992.

Oil and gas are two areas where the media hype is nothing short of extraordinary. The I remember reading an article in the last three months with dire predictions talking about $300 or more a barrel.  Here we are at $63 a barrel…We were taught to get used to the idea of gas being $4 a gallon.  here in NYC at the moment we’re averaging $2.60. 

So what is the bottom line with all if this?  The fact that the media drives the world’s hysteria.  Sometimes journalists are working with hard facts but just as often they let their senstationalism get the best of them.  We become the victims because what they write and broadcast affects how the market reacts and hits us hard in the wallet.

And now we come to the most sensational media day of them all…Election Day… There can be little doubt that whoever wins, the mass media will have played the leading role in influencing public opinion one way or the other…

There’s no real avoiding this situation because we rely on the press to inform us, as well as entertain us and living in a democracy we are proud of the freedoms that enable the media to be sensational.  Curbing those rights would harm us even more in the long run, so a the end of the day we need to just sigh and resolve that we have to take some of the bad with the good.

Yesterday the Federal Reserve cut a key interest rate by half a percentage point.  They hope this will help stimulate the failing economy.  This is the second time the Feds slashed the rates by this amount within October alone.  It is truly a frightening time we are living in.  The Government intends to monitor the market quite closely in the coming weeks and to do whatever they can to aid in this disastrous situation.

The future president of the United States will have a giant mission to accomplish, as the American people are expecting their next leader to wake them from this nightmare.  Both candidates know what is expected of them and are focusing their campaigns during these few days on this vital matter.  But can either Obama or McCain rescue us? 

The coming days promise to be historic ones for this country.  By Wednesday morning most likely (given recent elections there’s no bet that we’ll know who won by then) we’ll either have a black President-elect or a woman Vice-President elect.  Buy beyond these symbols, our trek the polls will be to choose the leader who faces probably the biggest economic crisis since the election of FDR.

There can be no overstating therefore the importance therefore of the decision that awaits us.

Citing the financial mess we’re all currently mired in, New York City Mayor Michael Bloomberg called for an  extension of term limits. His proposal was approved in one of the tightest votes of the City Council with the numbers as close as 29-22.  Bloomberg is now allowed to run for a third consecutive term in office. 

I ask myself today after hearing all the upheaval on the topic, is this just pure greed?  It seems to me that Bloomberg’s business and fortune have prospered awfully well.  From the start of his mayoral career to this year he managed to jump from number 36 to number eight on Forbe’s list of millionaires.  He certainly is not hurting financially while sitting in office.  But now there is an economic crisis, as we know all too well.  Will it affect him too?  Perhaps not, but it most certainly affects his beloved city.

I would like to believe that what Bloomberg says is true, and that he intends to be in power for a third term not for his personal benefit but to help New Yorkers pull through on this long road ahead.   Maybe he does actually want to offer the city more choices during this economic crisis.  Not to mention, there is a benefit to stability within times of hardship.  

But, we made it through the aftermath of September 11 without our courageous leader Rudy, couldn’t we too make it through now?  And what’s stopping President Bush from staying in office for another four years?

This is big news but with the presidential election only days away, the press seems to be preoccupied.  It may not be on their minds, but it undoubtedly weighs heavily on this New Yorker’s heart.  Is three times really a charm?

The effects of this financial crisis has clearly still not hit its peak.  After the fall of Bear Stearns, Lehman Brothers, Merrill Lynch, and Morgan Stanley, the last of Wall Street’s five biggest companies, Goldman Sachs, proves unstable as well.  According to Bloombergs News an unnamed source testifies that Goldman Sachs will cut about 3,200 workers, or 10 percent of its staff in the coming days.  This only adds to the already volatile state of the American job market.  The Labor Department stated in Washington today that initial jobless claims increased by 15,000 to the astronomical number of 478,000 in the week of October 18.  State budget planners expect a loss of 40,000 financial jobs this year alone in New York.

This certainly does not leave us New Yorkers in an encouraging position.  On top of all this, we still do not know if this marks the end of the weakening financial state.  What more could still be awaiting us?  I, like most, am largely in the dark about how much worse things can get or for that matter when they’ll begin to turn in the opposite direction.  But, one thing I do think will have a large impact is the outcome of the upcoming presidential elections.

With November 4th just around the corner, both Obama and McCain are stepping up their campaigns.  Obama is benefiting from this crisis as he has been seen as a longtime supporter of a second package of stimulus measures to enhance government spending on public works and aid states.  McCain on the other hand, is much more apprehensive, and seeks the ability to prevent further crises by shutting down financial institutions that threaten financial stability.

According to a Reuters/C-Span/Zogby poll released yesterday Obama is leading McCain by 10 points, giving him his first double-digit lead yet and the gap pnly seems to be widening in that direction.

At least since the Deppresion of the 1930’s when FDR came across as the nation’s savior, the US has never been so fixed on the economy in choosing their chief executive and there’s a very good chance that this more than any factor will dictate who occupied the Oval Office come the end of January.