Matrix Blog

Archive for October, 2005

A Record 59% Of Consumers Think Realtors Do A Good Job: Is This A Lot?

October 31, 2005 | 10:09 pm |

The National Association of Realtors released a survey that said that public opinion about Realtors set a record high for the third year in a row [RISMedia].

Those surveyed were asked about the effectiveness of their Realtors and 59% found them to be effective. The NAR has been touting this as part of their 8 year public awareness campaign.

Being a Realtor can be a tough job. Is it just me or is 59% on the low side? I am not clear why this figure is being touted so much.

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A Taxing View Leads To A Revolt

October 31, 2005 | 9:48 pm |

In New Hampshire, town assessors are beginning to treat view amenities as a separate line adjustment. The idea is that if a property has a value premium because to its views, it is taxed over above other properties. In some markets, the view adjustment is a separate line item [Washington Post]

The concept here is that the overall value must be accurately reflected. It appears that the view amenity was not fully accounted for and it was significant enough for the state to itemize the adjustment which was the subject of the recent complaints.

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New Fannie Mae Forms Start November 1: Its The End Of The World As We Know It

October 30, 2005 | 10:49 pm |

And I feel fine…

The new Fannie Mae forms start this Tuesday November 1. Its days like this I realize how fun it is to be an appraiser. The form is being changed for reasons I still can’t explain. In fact, nearly all the forms are being changed at the same time. Something about conforming to changes in USPAP, forcing more thorough reporting, catching flips, etc.

I am sure software vendors are thrilled, appraisers are annoyed and lenders are frustrated. I love change. I love new things. However, this could be a potential fiasco in the making.

What day does use of the form begin? I am getting all kinds of instructions on when to start using the forms from my clients. The required use of the new form should begin on November 1 based on (per my clients):

The effective date of the report? (I am going with this)
The order date of the report?
Anything you have inhouse from that point on?

Here’s a few issues to consider.

  1. Fannie Mae does not buy all the paper that is sold to the secondary market. I understand that a number of these investors may not want appraisers to use the new forms. They are under no requirement to use them.

  2. Appraisers will be using the re-sending appraisals on the new forms that have already been delivered on the old form.

  3. I took this opportunity to launch an entirely new software application we developed with the new forms in it. Training for us will be doubly hard.

  4. This has been a revenue opportunity from trade groups and individuals to sell books and promote seminars, which makes the whole conversion even more scary (when it really isn’t).

  5. Judging by how hard it was for many lenders who optically scan incoming reports when they went digital, I suspect this won’t be much better.

  6. We will be managing more forms now since Fannie Mae made sure that these new forms would not be appropriate for any other use by including a series of poorly worded, extensive liability pitching to the appraiser, limiting conditions. Rest assured, we have all been told its no big deal.

On the bright side, I suspect most appraisers will expect to be compensated for the additional work and frustration. The new forms require more information and add more liability, some of it unrealistic, in addition to the cost of new software upgrades.

At the end of the day, we will all survive and get the reports out the door, perhaps late and incorrectly, but we will figure it out as we go on our own.

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Its The Great Pumpkin Ben Bernanke, And The Yield Curve Is Nearly Flat

October 30, 2005 | 9:40 pm |

In Bill Gross’ PIMCO Monthy Blog “Investment Outlook” PIMCO he comments that:

…because the U.S. economy has evolved into a highly levered finance-based economy, it stands to our reason that this modern day version is more sensitive to changes in interest rates than those of years past.

As an economy, we are more sensitive to changes in interest rates then in prior rate tightening cycles. “By the time 10-year and 2-year Treasuries reach parity, as is almost the case now, the economy is typically slowing and the Fed is at or near the end of its tightening cycle.”

In other words, the Fed’s strategy of raising short terms rates to reign in the economy to stem inflation may be coming to an end. If you agree with Bill Gross’ assessment, then upon further reflection its not clear whether this is a good thing for the housing market. It suggests a weaker economy which may help temper mortgage rate increases, which housing may be especially vulnerable to, but it also may mean that a weaker economy will not be able to keep pace with rising housing prices because of weaker employment and other factors. The result? A more tepid housing market characterized by flat or modest appreciation and a coooling off of the rate of new development.

Webmaster’s Confession:
I had to get a Halloween reference into this post. ;-)

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New Home Sales and Existing Home Sales Are Way (30 to 60 Days) Apart

October 30, 2005 | 9:00 pm |

The US Census Bureau clarifies the difference between new home sales and existing home sales. “New home sales and existing home sales are released each month at about the same time. Many comparisons are made between the two series, but before doing any comparisons, one must be aware of some definition differences that affect the timing of the statistics. “

New Home Sales
“The Census Bureau collects new home sales based upon the following definition: “A sale of the new house occurs with the signing of a sales contract or the acceptance of a deposit.” The house can be in any stage of construction: not yet started, under construction, or already completed. Typically about 25% of the houses are sold at the time of completion. The remaining 75% are evenly split between those not yet started and those under construction. “

Existing Home Sales
“Existing home sales data are provided by the National Association of Realtors®. According to them, “the majority of transactions are reported when the sales contract is closed.” Most transactions usually involve a mortgage which takes 30-60 days to close. Therefore an existing home sale (closing) most likely involves a sales contract that was signed a month or two prior. “

To Summarize
Given the difference, the indicated trends in New Home Sales would probably lead Existing Home Sales by 30 to 60 days, the length of time it takes for an existing home sale to close from point of contract.

However, New Home Sales are more volatile from the standpoint that it is a much smaller data set as they represent something like 10% the number of Existing Home Sales.

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The Inflation Engine Pushes Mortgage Rates Up: Big Oil Has Some Explaining To Do

October 30, 2005 | 8:14 pm |

The spike in gasoline prices occurred before the wrath of hurricanes in late summer. After adjusting for inflation, rising gasoline prices pre-hurricane were still relatively low in historical terms and perhaps thats why inflation had remained low. At that time, bond investors viewed the sharp increase as more likely to provide a drag on the economy rather than stir up inflation concerns.

There has been a lot of speculation that high gasoline prices are stimulating inflation. However, for perspective, gasoline prices today adjusted for inflation are about the same as the 1950′s but real per capita income was less than half as much today [Boston Globe]. In other words, gasoline prices are not high relative to historic norms.

However, that can be a bit simplistic since the economic engine is built around lower price levels than we are currently experiencing. The persistence of high gasoline prices may be one of the primary inflation catalysts as as core inflation (excluding food and energy) is virtually flat. To make matters worse, oil companies are now posting record profits [Marketwatch] which is of particular concern to many since the gasoline prices have risen so much in such a short period of time.

Inflationary pressures are now beginning to influence a modest rise in mortgage rates.

Of note
Gregg says oil company profits should be taxed [Boston Globe]
Katrina & Oil Prices: The Perfect Storm [Matrix]


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Fed Chair Nominee Says There’s No Housing Bubble to Go Bust

October 30, 2005 | 7:04 pm |

The Fed Chair nominee doesn’t think there is a looming bust in the housing bubble [Washington Post]

“U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, “largely reflect strong economic fundamentals,” such as strong growth in jobs, incomes and the number of new households.”

This is likely to be one of the key topics of the senate hearings for his nomination.

He has maintained the the “cooling” of the housing market won’t hurt the economy. This is an interesting position since housing has been so closely tied to current consumer activity, which accounts for 2/3 of the economy.

If housing markets fall, Bernanke appears to be unwilling to use short term rates as a tool to prop them back up. The overall economy takes precedence over individual homeowners. Of course, with Greenspan, there has recently been a disconnect between mortgage rates and short term rates so it is not clear whether this subtle change in policy will result in any difference in the housing market.

Other Links

Bernanke sees no housing bubble in U.S. [UPI]
Ben Bernanke has a tough act to follow as Fed chairman [Newsweek]
So long Alan and ‘measured?’[CNN]
What if the Fed Chief Speaks Plainly? [NYT]


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Nobel Prize In Economics: Housing Without A Helmet And An Invisible Hand, eh?

October 27, 2005 | 9:10 am | fedny |

Thomas Schelling, professor emeritus at the University of Maryland won a Nobel prize in economics whose work on the relationship between competition and and social welfare was highly regarded [NYT]. He contended that we can learn more about what people value by looking at the rules that result rather than the choices made by each individual. This is contrary to Adam Smith’s theory of the invisible hand that says that self interest promotes the greatest good of all.

Using a hockey example, a player may increase their odds of winning by playing without a helmet because of better visibility but increases their odds of injury. However, if everyone follows suit, then all players increase their odds of injury and the advantage of winning evaporates. This is why helmet rules come into play. Similar comparisons can be made to restrictions on Nascar race cars, labor wage gains, working longer hours for a promotion, etc.

“As in hockey, many of the most important outcomes in life depend on relative position. Because a “good” school is an inescapably relative concept, each family’s quest to provide a better education for its children has much in common with the athlete’s quest for advantage. Families try to buy houses in the best school districts they can afford, yet when all families spend more, the result is merely to bid up the prices of those houses. Half of all children will still attend bottom-half schools.”

In other words, if everyone takes the same action, the bar is simply raised higher making it more difficult for everyone or negating the perceived advantage of the original action.

Webmaster’s Note: The author of this NY Times article is Robert H. Frank , an economics professor at Cornell University and co-author of “Principles of Microeconomics” with Ben S. Bernanke, recently nominated to replace Alan Geenspan as Chairman of the Federal Reserve. This is one of the best articles on economics I have read in a long time.


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A Disputed Possible Solution To Appraisal Disputes

October 26, 2005 | 9:32 am |

We have outlined in great detail within Soapbox, that appraisal pressure is prevalent in the lending industry, encouraged by the structure of the lending process and the lack of political clout held by the appraisal industry.

A consumer activist group National Community Reinvestment Coalition has set up a trade group to arrange for the arbitration of business disputes over appraisals [American Banker]. “Members of the Center for Responsible Appraisals and Valuations would also agree to follow a “code of conduct.” They would include all parties to the process – lenders, appraisers, and various intermediaries.”

Here is the NCRC press release. [PDF]

One of the issues the lending industry has problems with, and rightly so, is that in a mortgage situation, the appraisals is being done for the lender, not the borrower. However, the problem with this structure, is that the lender is not incentivised to weed out appraisers that are there strictly to make the deal. Problems usually occur years down the road. Lack of focus on competency is clearly evidenced by the proliferation of appraisal factories (very large shops largely manned by trainees) and appraisal management companies who largely measure appraisal quality by turn around times.

Curently, lenders typically sue the appraiser’s E & O insurance company which is difficult because the insurers are in the business of litigation and its often difficult to extract claims.

I believe the objective here is to improve the reliability of appraisals. Since appraisal licensing came into effect in 1991 through FIRREA, the focus has been on licensing, required coursework and continuing education.

However, the reality is that licensing has been ineffecive because the states, who are charged with administering their interpretation of the federal law, have limited budgets and minimal staffing. Even if they did have adequate staffing, is a state agency really in the position to determine whether the appraiser used reasonable comps? I don’t believe so.

Erick Bergquist, the author of the American Banker article provides a quote from a lender:

[A National Lender's] spokeswoman said Tuesday that appraisals are “something we already have some pretty stringent guidelines around and monitor on an ongoing basis.” As a result, “we really haven’t seen a big issue.”

This is the typical lender response to this issue which shows how, in rising markets, there are generally no problems since the deals usually get done. Stringent guidelines usually refer to more quantifiable requirements that generally do not impact quality. Its very difficult to measure quality and therefore most emphasis is placed on turn times. For a lender to say there is really no issue, really is the issue.

Perhaps the outcome of this effort will be to create additional awareness of the problem, but I doubt it will be universally accepted by the lending industry. It has to be for this to be universally accepted. However, I believe it is a step in the right direction.


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Existing Home Sales See Huricane Related Surge

October 25, 2005 | 10:13 pm |

The NAR reported that existing home sales were unchanged for September [Marketwatch] at the annual seasonally adjusted rate of 7.28 million homes, the second highest in history. The hurricanes prompted a sharp increase in purchases outside the damaged regions which offset weaker sales levels in other regions.

The median sales price of a US existing home was $212,000, up 13.4% over the prior year. Inventory increased 0.3% to 2.85 million or a 4.7% supply. The NAR interprets inventory as still “relatively lean.” I am a big fan of the charts churned out by Calculated Risk, and once again they have created an excellent graphic – this time covering inventory.

So existing homes sales, which is about 10x the number of new housing starts and therefore more telling of the overall housing market condition, was at a record level but did not see gains. At the same time, rising inventory appears to be gaining momentum. This should temper price appreciation in the coming months.




Other Related
Existing Homes: Sales Strong, Inventories Rise Seasonally [Calculated Risk]
Sept existing home sales flat [Reuters]


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