Moving right along

"Long lakes are what the rivers shall be
Named in later days, preparing, too, the land
For yet another breath of inspired air expired;
What shall we call these messages that pass?--
The past that passed and died
Just as, or as the case may be,
Because what comes
Is what we'll really know?

The horizontally falling man questions still, despite
The rumor of a body, what it is of what he wants to know
Of what he wants to know, or answer."
--Nilo Kovar

I recently attended an industry seminar entitled "Thawing the Financial Frost". All five panelist had impressive credentials and offered some distinct points of view. The five included a senior economist for the New York Federal Reserve Bank, an economics reporter for The Wall Street Journal, the managing editor of Crain's New York Business, the vice president of Bank of America Home Loans, and a long time NYC attorney specializing in real estate. What was most interesting was not so much the content of what was said but rather the shared dynamic exhibited (to a greater or lesser degree) by each panelist.

In autumn of last year we entered a precipitous economic situation creating an atmosphere of fear and anxiety. As one might expect, many, feeling off balance, desperately sought a foothold or something to grab onto in an effort to regain balance and control. Among the panel (with the exception of the attorney) this symptom seemed to linger.

There is a simplification that goes along with this process. It calls for taking what in reality are variables and somehow converting them to constants--to stop the motion (now viewed as commotion) and find "solid ground". This is often done by taking mental snapshots which are easier to view but, being frozen in time, offer two dimensional perspectives that don't really represent what is occurring.

During recent decades more and more information has been introduced into our conscious world and the ability to assimilate much of it has been narrowed to fewer and fewer people. This has been accompanied by a tendency to impart reverence to those who know what's happening. This is done when, I would assert, the objects of our attention should be those who know what's going to happen. This is not a contentious notion. Those who respect and supplement their own experiences with those of past generations and are serious students of history are in a position to do this with great accuracy. For them there are few surprises. The downturn of 2008 was not a surprise, the sub-prime debacle was not a surprise, the events that have since occurred have not been a surprise, and what happens in 2010 will, most likely, not be a surprise. By expanding the sources of data to include information outside our own mental kinesphere we redefine standard deviation. What so many would view as a ten-sigma event--a black swan--and not worthy of consideration as a real possibility is instead recognized as closer in probability, and events more recent in time or greater frequency are viewed against a larger background and are less likely to be overscored. Preparations to avoid dire consequences or to take advantage of what gamblers call "the overlay" becomes possible.

In 1998, Long Term Capital Management, a hedge fund founded by 2 Nobel-winning economists and further attended to by some of Wall Street's star traders, followed a formula that solipsistically assigned zero risk to using their investment model. The risk they presumed dwelt 10 standard deviations (ten-sigma) away. This was done when giving attention to more complete data would have shown the true risks involved. In fact, these risks eventually surfaced big time and required the Federal Reserve Bank to intervene and prevent financial turmoil in the world markets.

In 2004, with the Boston Red Sox down 0-3 to the Yankees during the American League play-offs, the odds makers were giving 50 to 1 odds against Boston advancing and winning the World Series. The data they chose to use in their calculations included popular but irrelevant factors such as the so-called "Curse of the Bambino" and the fact that Boston had never risen from such a deficit to win a Pennant. If anyone were to have closely examined the more pertinent statistics available and assign the proper weights as they related to relative talent and performance among the teams, they would have realized the probabilities of Boston winning the Pennant and subsequently the World Championship were closer to 1 in 20. The house was laying odds way over the actual probability of this event happening and those who recognized this profited immensely from the overlay.

A recent and very simple real estate example involves how the implications of absorption rates were being viewed a mere 8 months ago. Here we are dealing with an analysis that can be represented as containing two variables: how many active listings are presently on the market and, at what rate they are being sold (this is a bit of a simplification, but workable). When these two numbers indicate it will take more than 11 months to eliminate the present inventory, lenders ask that the market be labeled as a "declining" one. Influenced by the overly depressed mental climate rampant in March 2009 and because of the tendency to "snapshot" that present condition, many lost their ability to recognize the speed at which the high absorptions rates could return to "stable" market status. By not assuming a glut of inventory (which analysis would show as being less likely than perceived by an anxious public) and by realizing the near standstill in sales could not continue (as history and economics clearly shows) the advent of our return to a "stable" market in certain sectors seven months later would not have come as such a surprise.

The issues discussed by the panel were considerably more complex in nature but certainly understandable. Ultimately, four of the five panelist seemed wary of making any future projections and it seemed that whenever their caution was accompanied by analytic reference, the tendency to assign constant-like attributes to variables affected their conclusions, or led to the lack of any. Sometimes, when examples were given--and I find myself reiterating this point as I have since last Fall--the historical data presented seemed to ignore the next dimension of variability as it relates to the ever increasing speed with which most things happen as compared to 10 years ago, or 20, etc.

We have been fortunate to be part of the computer age, and while it is unprecedented, its dynamics and the structure of its role can be drawn from the past and much of it influence on the present and future can be accessed through objective examination.

So what you have right now is an opportunity to take advantage of what's to come. To buck the stilted linearity of common thought, to add to your own calculus the differential and integral kind, and the knowledge its greater dimensionality offers. To know appreciation will happen sooner than presently anticipated.
Ask yourself:
What future awaits when some simple variables of the function already read: buyers' market, lowest rates, biggest incentives, while others have, are about to, or are ultimately bound to turn a corner?
What future awaits for any hard asset when inflation next arrives?
When have you ever seen any residential buyer in Manhattan take a loss when they sold after owning for 5 years or more?

With these and other positive factors in place, history and the mere presence of so much negativity should help you understand the overlay you have, know the true risks involved, and see the impetus for recovery.

For an update to our 11/9 posting about the new VOWs coming to NYC please see
this article in The Real Deal (VOWs aka Virtual Office Websites offer registered clients the most comprehensive online real estate search engines to maximize success).

--Leigh Zaph. (any comments can be emailed to us at, thanks).