“The trend from the beginning of the year forward, is flat or slightly downward,” Michael Slattery, the Real Estate Board of New York’s senior vice president, told me today. “We’re starting to feel the impact of economic conditions.”

The median price for a Manhattan apartment (condos and co-ops) rose just 2.8% to $845,000 and sales transactions dropped 20% in the third quarter compared to the same period a year ago. Median home prices -- including co-ops, condos, and houses -- dropped in every other borough (down 9% in Brooklyn, Staten Island, and the Bronx, and down 17% in Queens).

This is a dramatic change. In the first quarter of this year, the median price for a Manhattan home jumped 18%, to $872,000, compared with the same period a year ago. The housing market benefitted from the city's relatively strong economy and the weak dollar, which has attracted foreign buyers.

But the pressures on the city's home prices are likely to increase. The third-quarter report, which accounts for the three months ending September 30, doesn't fully reflect buyer sentiment in the wake of last month's investment bank meltdown.

And there's an inherent lag in real estate data. A buyer typically signs a sales contract three months before closing on a property, and as much as a year before closing on a new home. So, we’ll see the real impact of the Wall Street layoffs in the months to come.

Another thing to watch out for. Builders, rushing to meet a June 30 tax abatement deadline, applied for an astounding 17,000 new construction permits in June, more than the first five months of the year combined, Slattery said. The permits required that the builders had already poured the foundation for the buildings, meaning that most of those units will likely be built, he said.

It remains unclear how many of these permits are for condos or for rentals. And Slattery said he expects fewer permits to be issued in coming months.

But it seems to me that the flood of new supply could cause serious problems for Manhattan’s condo market. Sales for condos are already off by 37% in Manhattan compared to a year ago. Co-ops, by comparison, which are in limited supply, are actually up 4% compared to a year ago.

With that philosophical preamble, allow me to point you to an excellent article that appeared last March in The Oregonian newspaper. It exposed a memo by someone inside JPMorgan Chase (we still don't know who) instructing lending officers how to commit fraud and get loans approved by the bank's computer, known as Zippy.

The memo’s title says it all: “Zippy Cheats & Tricks.”
It is a primer on how to get risky mortgage loans approved by Zippy, Chase’s in-house automated loan underwriting system. The secret to approval? Inflate the borrowers’ income or otherwise falsify their loan application.

Hat tip to Barry Ritholtz, who mentioned The Oregonian piece in an Oct. 2 blog post.

Home sales were down 34% in the third quarter. The median price of a condo still climbed 10% to $975,000, but that was entirely driven by some of the fancy new properties coming on the market. Those buidlings were benefiting no doubt from the cheaper dollar and wealthy foreignors looking to invest in one of the world's greatest cities. Prices of resale property--condos that had already traded hands before--were flat at $850,000.

The national market followed a similar path last year, with transactions falling but market prices still climbing. That's unsustainable though, especailly given all the carnage on Wall Street and its impact on jobs and pay in New York City.

So just how much will that dream townhouse on the Upper East Side cost you? $10 million, up 37% from last year. And the cool loft in Soho? They are down 26% in price but will still set you back $1.3 million. Wait a few months.

Posted by: Aaron Pressman on September 29
Fresh off the false and politicized attack on Fannie Mae and Freddie Mac, today we’re hearing the know-nothings blame the subprime crisis on the Community Reinvestment Act — a 30-year-old law that was actually weakened by the Bush administration just as the worst lending wave began. This is even more ridiculous than blaming Freddie and Fannie.

The Community Reinvestment Act, passed in 1977, requires banks to lend in the low-income neighborhoods where they take deposits. Just the idea that a lending crisis created from 2004 to 2007 was caused by a 1977 law is silly. But it’s even more ridiculous when you consider that most subprime loans were made by firms that aren’t subject to the CRA. University of Michigan law professor Michael Barr testified back in February before the House Committee on Financial Services that 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations. As former Fed Governor Ned Gramlich said in an August, 2007, speech shortly before he passed away: “In the subprime market where we badly need supervision, a majority of loans are made with very little supervision. It is like a city with a murder law, but no cops on the beat.”

Not surprisingly given the higher degree of supervision, loans made under the CRA program were made in a more responsible way than other subprime loans. CRA loans carried lower rates than other subprime loans and were less likely to end up securitized into the mortgage-backed securities that have caused so many losses, according to a recent study by the law firm Traiger & Hinckley (PDF file here).

Finally, keep in mind that the Bush administration has been weakening CRA enforcement and the law’s reach since the day it took office. The CRA was at its strongest in the 1990s, under the Clinton administration, a period when subprime loans performed quite well. It was only after the Bush administration cut back on CRA enforcement that problems arose, a timing issue which should stop those blaming the law dead in their tracks. The Federal Reserve, too, did nothing but encourage the wild west of lending in recent years. It wasn’t until the middle of 2007 that the Fed decided it was time to crack down on abusive pratices in the subprime lending market. Oops.

Better targets for blame in government circles might be the 2000 law which ensured that credit default swaps would remain unregulated, the SEC’s puzzling 2004 decision to allow the largest brokerage firms to borrow upwards of 30 times their capital and that same agency’s failure to oversee those brokerage firms in subsequent years as many gorged on subprime debt. (Barry Ritholtz had an excellent and more comprehensive survey of how Washington contributed to the crisis in this week’s Barron’s.)

There’s plenty more good reading on the CRA and the subprime crisis out in the blogosphere. Ellen Seidman, who headed the Office of Thrift Supervision in the late 90s, has written several fact-filled posts about the CRA controversey, including one just last week. University of Oregon professor and economist Mark Thoma has also defended the CRA on his blog. I also learned something from a post back in April by Robert Gordon, a senior fellow at the Center for American Progress, which ends with this ditty:

It’s telling that, amid all the recent recriminations, even lenders have not fingered CRA. That’s because CRA didn’t bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA — or any federal regulator. Law didn’t make them lend. The profit motive did. And that is not political correctness. It is correctness.

Las Vegas was hit the hardest with prices down nearly 30%, followed by Phoenix and Miami, which were down 29% and 28% respectively. To put these declines in perspective, during the last big housing bust from 1990 to 1992, the steepest year-over-year decline was 6.3%. Prices peaked in October 1989, according to the Case-Shiller numbers. They hit bottom in February of 1994 but it took until January of 1998 for prices to reach their previous high again, a cycle of nearly nine years.

There was some good news in the Case-Shiller data. While all twenty cities showed year-over-year declines, six managed to post monthly increases from June to July. Those cities were Atlanta, Boston, Dallas, Denver, Detroit and Minneapolis. Denver had the largest month-over-month increase at 1.3%. "There are signs of a slow down in the rate of decline, but no evidence of a bottom," David Blitzer, head of S&P's index unit said.

The National Association of Realtors, whose data is reported by its members and follows the entire country, not just the largest cities, reported a 7% median home price decline in July to $212,000. The association is already out with its August numbers, which show a steeper 9.5% fall to a $203,000 median price nationally.

One reason why prices have declined so sharply is many of the homes being sold are distressed situations--short sales and foreclosures. “They’re bank-owned properties with dead lawns and green swimming pools," says Rob Jensen, a RE/MAX agent in Las Vegas. "They account for 75% of the sales right now. That pushes pricing down. It's just a snowball effect."

Jensen figures prices in Las Vegas are back to 2002 levels. But there is a silver lining. "So many people were priced out for so long," he says. "The last four years you couldn’t find a home for under $300,000. Now, you can find a great home with a pool for $250,000."

“I am totally disgusted as an American by the leadership shown by both parties. We have a deficit, $350 billion. This bailout would cost $700 billion. We’re going to go to a trillion. I watched the debate. Lehrer should have asked them: What do you plan to do? If either one had real leadership he would have looked over to the other and said my fellow Americans, 70% of the budget are entitlements, Congress can’t touch that. Another 30% of the budget is discretionary, but it's things like national defense. We have as much ability to afford $700 billion as we do being Mary Poppins! America can’t afford another trillion dollars in debt. Our GDP can’t afford it. All Americans are going to pay the price. We’ll have a cheaper dollar and higher oil. We are going to save our institutions, but not by buying assets and bringing them to Washington. If a bureaucracy buys those credits its tantamount to Hari Kari."

"Those assets should stay where they were created. Warren Buffet showed us the way. The government stiffens the balance sheets of the troubled companies with preferred stock. All you institutions, we’re going to save you, but you have to cut your operating expenses, pay bare minimum salaries, no bonuses, until the government gets its money back. What will happen is the bankers will say tomorrow okay, let people stay in those homes. Instead of the Ditech commercial where you had people saying forget about paperwork. They’ll ask them to show how much they afford. Loans will get renegotiated. Homes will go back to $250,000. The people that live in them will pay what they can afford. The banks will have huge tax losses. The stocks will drop, just like they’re supposed to. This phony inflation in the economy will end. Shame on both the political parties. No more, enough is enough. Shame on both of those guys. Do they both have such a low opinion of us? Obama with his tax cuts and unpaid expenditures. McCain talking about earmarks. Earmarks run for one day. We can’t pay people social security at 65, we have to pay them at 70. What is this constant procrastination of the truth. I don’t give a damn about being polite.”

The Dow Jones average is down some 700 points so far today, 400 of that in the last ten minutes as vote was being tallied. It seems this bailout is toxic, much like the mortgages Treasury Secreatary Paulson hoped to buy with the money.

As my blog colleague Dean Foust lays out in an excellent story on Businessweek.com, Citigroup could end up getting quite a deal on its $1 a share purchase of Wachovia.

The acquisition quadruples the size of Citigroup’s branch network to more than 4,400 locations. Whereas before the company was really just a player in New York, California and Texas, Citibank—as its branches are known-- now has major positions in Florida, North Carolina, New Jersey and Pennsylvania. “Citigroup passed over Washington Mutual because they were focused on a bigger target: Wachovia.” says Bart Narter, senior vice president of the Banking Group at Celent, a Boston-based financial research and consulting firm. “Citigroup instantly becomes a major player in the Southeast and Mid-Atlantic regions.”

The deal could turn out to be a good one too for the F.D.I.C. which gets $12 billion in Citigroup preferred stock. The federal fund will only have to cough up money if the losses on mortgages Citigroup acquired top $42 billion, a very high number.

Unlike Washington Mutual investors, Wachovia shareholders are at least getting that $1 a share. There may be some additional assets for bondholders as Citigroup is not acquiring Wachovia’s AG Edwards brokerage firm. WaMu shareholders, by comparison, were wiped out. WaMu bondholders got more bad news. The firm, really just a shell at this point, declared bankruptcy. WaMu had some $ 6.8 billion worth of bonds outstanding, according to the research firm Gimmie Credit. On Friday they were trading at just 32 cents on the dollar.

The new home inventory is the lowest it has been since August 2004, according to a new Census Bureau report. Unfortunately, new home sales dropped 11.5% to a 17-year low in August. The supply of homes at the current feeble sales pace dropped to a 10.3 months supply in August from 10.9 months in July.

This graph from the Businomics Blog gives you a good picture of the dramatic rise and fall of new construction.

Whoo Hoo!
That’s what many Washington Mutual customers are saying as several weeks of turmoil at the nation’s largest savings and loan comes to an end. WaMu is being acquired by an even larger rival, J.P. Morgan Chase, whose name alone promises some stability.

There’s lot of sadness here of course. WaMu shareholders have gotten wiped out--lost everything. That’s not true of Alan Fishman, WaMU ceo for all of two weeks, who might be entitled to $18 million in severance and signing bonus.

Then there are the employees of both WaMu and Chase who will lose their jobs. Chase CEO Jamie Dimon say the company will close about 10% or 500 of the combined branches.

WaMu’slending practices were clearly bad. But the company’s TV advertisements provided a lot of humor in an industry not known for levity. Maybe the takeaway here is that your bank shouldn’t run funny ads depicting other bankers as fat old guys in suits, drinking champagne and soaking customers for fees. Maybe we were all suckered by WaMu’s cappuccinos and free Internet service in branches.

Or maybe we can continue to hope there are bankers out there who take their business--but not themselves--seriously.

You have to love those New Yorker cartoons. The kid breaks open his piggy bank and says "Now we just have to sit back and wait for the Fed to bail us out."

Yes, the big bailout is upon us. Compromises will be made. The money will get paid in stages. There will be limits on executive pay. The government will get some equity in the troubled firms that participate.

Big banks will get to unload their worst loans on us taxpayers. Stock prices will recover. Credit will flow again. But what does this really mean for home owners?

Some have suggested that the wave of foreclosures will end. Housing prices will bottom out. Don't bet on it. A little historical perspective is warranted.

A previous Bush president—I’m not trying to infer anything here—created a similar government bailout mechanism in 1989. The Resolution Trust Corp. was in business for six years. Some $300 billion worth of bank assets were taken over. Tens of thousands of distressed properties were sold. It took years to work these through the system. It wasn’t until about 1995 that housing prices in the U.S. bottomed out.

Homeowners are in for a long, bumpy ride. That’s what history tells us.

The California Reinvestment Coalition, a non-profit representing low income families, suggests a six-month moratorium on foreclosures to allow families to remain in their homes while working with housing counseling agencies and loan servicers to negotiate affordable workout plans. The group also suggests reforming the Bankruptcy Code to allow judges to modify all home loans. They presently can modify second home loans.

Congressman Charles E. Schumer, opened an economic outlook hearing today saying he supports a bailout, but “let us be clear – Americans are furious. Even on Wall Street, $700 billion is a lot of money, and none of the thousands of money managers would invest that sum without appropriate due diligence. I think we must seriously consider putting this program in place in installments – so that we do not limit the Secretary’s ability to act as necessary, but are able to evaluate the effectiveness of these expenditures over time."

Another idea Schumer proposed is insurance fund modeled on the FDIC and paid for by the financial industry that can defray some of the long-term costs of the bailout plan. Schumer said he remained "puzzled by the resistance to equity being part of the process. It seems only fair that we reward taxpayers if, as we all hope, this plan succeeds."

Kenneth T. Rosen Chairman, Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley: “Whether or not Treasury purchases these securities, the only way to treat the mortgage problem is a massive loan modification at the consumer level. I propose an immediate 90-day moratorium on foreclosures to allow the modification plan to be put in place. Directly address the problem by the Treasury buying Preferred Stock at a high interest rate. (The high interest rate will encourage companies to refinance as soon as possible.) Suspend "Mark to Market Accounting" for illiquid but performing loans. This will break the death spiral of asset value mark downs that require companies to raise more capital as they report mark to market losses. Aggressively use Fannie Mae, Freddie Mac, and the Federal Housing Administration to return the capital flow to the residential mortgage and housing sector.”

And here’s voice in favor of the bailout from my friend Paul Schlosberg, a former securities firm president. “It took years to build up these abuses and it will take years to work them out. We have to stem the paranoia and just offer comfort that that system won’t melt down. If we fail, it will be a global failure. If you get panic overseas, then it’s a tidal wave. We have to get out a plan out that stops the bleeding. Then we’ll figure out if it needs to be changed later.”

Republican Party presidential contender John McCain did that one better yesterday, saying: ``The senior executives of any firm that is bailed out by Treasury should not be making more than the highest paid government official.'' The president is the highest-paid federal official, earning $400,000 a year, plus $50,000 for personal expenses.

President Bush hopes to provide up to $700 billion to buy troubled mortgage assets from banks. The proposal is being hotly debated in Washington this week. I haven’t seen any estimates yet as to how many institutions might take advantage of the government’s offer. If such a provision were included it would likely apply to other institutions that have recently sought government aid, including IndyMac and AIG.

Regulators already blocked $24 million in severance payments to former Fannie Mae CEO Daniel Mudd and former Freddie Mac CEO Richard Syron.

One group of naysayers runs www.stopthehousingbailout.com. The group says Washington is sending the wrong message, bailing out people who made poor choices or who may have even engaged in fraud. The argument is that by foisting this kind of debt on all taxpayers, the bailout is rewarding those who shouldn’t be rewarded and forcing citizens who made wise decisions about their money to pay the price.

The President says the gravity of the situation makes the bailout necessary. "Failure to act would have broad consequences far beyond Wall Street,” the President said in a statement today. “It would threaten small business owners and homeowners on Main Street.”

Stopthehousingbailout.com also makes the argument that this rescue plan hurts minorities because a larger percentage of whites own homes and will get bailed out. I’m not sure I agree with this argument. I’ve been studying lists of bank-owned properties. Foreclosures seem to be occurring in far larger numbers in black and Latino neighborhoods.

There’s a form letter on the stopthehousingbailout.com site that you can use to send to your local politician.

What do you think of the President’s proposed bailout?