Matrix Blog

Archive for November, 2005

New Housing Data: Is The Glass Half Empty Or Half Full?

November 30, 2005 | 12:02 am | |

It depends on who you listen to…

Today the US government reported a record number of new-home sales [MarketWatch] which seemingly contradicted yesterday’s release of existing home sales [WSJ] by NAR.

This has brought further debate to the housing market interpretation. The media seems to be betting on a burst of the bubble [MarketWatch] while the NAR seems confident in a soft landing next year.

The MarketWatch article suggests three paths are possible:

  1. “any further acceleration in housing could fuel a spurt in consumer spending, but at the risk of forcing the Federal Reserve to continue raising interest rates beyond what’s now expected.”

  2. “a collapse in housing, if it were to happen, could slow job growth, shatter consumer confidence and lead to a significant retrenching in their spending.”

  3. “a gradual decline in housing would likely keep the U.S. economy growing at a slower but healthier pace, allowing the Fed to conclude its rate hikes. Most economists expect this third option to come to pass.

“Being the first to call the end of the housing boom has become a favorite parlor game for economy watchers. As evidence, they’ve gleefully pointed to the reduction in mortgage applications, to an increase in unsold homes on the market, to a slowing in home price appreciation and to a drop in home-builders’ confidence.”

This is interesting because the existing home report and the new-home report are based on a different data set and mean very different things in a changing market [Matrix].

Existing home sales lag the market by 30 to 60 days or more because they reflect closed sales. New home sale stats are based on contracts.

So if there is a change in the market, new home sales would be considered the leading indicator. However, its reliability should be tempered by the fact that new home sales represent about 10% of existing home sales.

In other economic stats released today:

At the same time, consumer confidence spiked [] reversing a 2-month slide.

US Factory orders rose 3.4% and durable goods orders posted strong gains as well. [ABCNews]

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This Just In: Appraising Is Not An Exact Science

November 30, 2005 | 12:01 am |
Source: NY Public Library

In the article Md. court rules ‘appraising property not an exact science’ [Valuation Review]

“A U.S. District Court in Maryland denied a debtor’s bankruptcy appeal that was founded on claims that the bankruptcy judge erroneously judged the value of her property.”

Appraisal: Art Or Science? [RealtyTimes]

Here’s my position on appraising as an art or science:

This point has been debated for eons. I always found that when appraisers have said appraising is an art, they usually didn’t have good comps.

The appraisal process includes many points of subjective interpretation and thats the “art”. Adjustments and theory, thats the science. When I hear the use of this phrase I think of the artist Jason Pollock, splattering paint all over a canvas shouting “Here’s The Value!”

As appraisers, please don’t resort to this sort of phraseology, its corny and dilutes our professionalism.

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Front Yard Politics: Grass Losing Ground To Pavement

November 30, 2005 | 12:01 am | |
Source: NYT

In today’s article For Some, Grass Is Greener Where There Isn’t Any [NYT] the author covers the odd phenomenon of paving over front yards. This has taken on a political undertone in Kickin’ Asphalt: Pols Attack Front Yard Driveways [Queens Ledger]

“While there are no official city figures on pave-overs, it is clear that the fight is still being waged in the other boroughs and in some suburbs, where signs of creeping urbanism threaten the leafy suburban aesthetic…New York City has no rules prohibiting property owners from paving over their lawns, but Tony Avella, a city councilman from Queens, hopes to change that…Paving over has become so commonplace that it is spurring differences between neighbors and debates within households about whether to dispense with the lawn.”

Source: NYT

Apparently the same issue is a recent major concern in Dallas where a 50% coverage limit is being proposed: Council reviews ordinance to limit pavement in yards [Dallas News]

Some quick research yielded lots of pavement ordinances, but I lost interest after 2:

Garden Grove, CA

Garland Grove TX

Redlining Is Alive And Well

November 29, 2005 | 9:19 am |

Several months ago, our appraisal firm completed an appraisal of a one family in an urban market that has been undergoing gentrification for about five years. The property was renovated (not to excess) and if it closed, would be the highest property sold there recently. It was exposed to the market for a typical period of time and sold near the list price. We used sales from the immediate area that were renovated and recently transferred. The market is rising rapidly and this property was slightly larger than the recent sales, hence its record price. It was not a white elephant.

Because the sales price was above $1M, two appraisals were completed as SOP and we believe the other firm also came in at or near the purchase price.

The lender then ordered a field review and their local staff appraiser (who was located out of state) commented to the real estate broker before walking into the property that “There is no way any house in [neighborhood] could ever be worth more than [price]. Needless to say, this field review came in approximiatley $1M low or about half the purchase price. The field review contained sales that we either inspected or we were familiar with. The sales were basically shells (wrecks), or multi-family properties with rent stabilized tenants. Amazing.

The buyer went to another national lender who did the deal and I believe they relied on the two appraisals.

Myself and another principal, who was the appraiser for this assignment, were removed from the approved appraiser list without notice (because I reviewed the report), yet the remainder of my staff, including trainees were still approved. A mortgage broker who submitted our reports to this lender was told they would accept our firm’s reports if we would simply remove our names from the reports and they could jam it through the system. Of course we would never do that.

We dogged the lender for weeks for an explanation since we did nothing wrong. Ultimately we were reinstated after other work of ours was reviewed.

In summary, it appears that:

  • This lender was redlining.
  • Their appraisers are being pressured to come in low on sales in marginal areas because of pre-conceived opinions about values and risks. It ironic that appraisal pressure in this case is clearly the opposite of what we typically see, which is to come in higher than the value.
  • Competent appraisers can be easily weeded out in favor of form-fillers. We fought them on principal for our reputation despite the fact that we do very little work for them.
  • Out of state review appraisers are not always experts in the markets they review. How can lenders base significant loan decisions on out of state review appraisers, even if they are on staff?
  • If lenders take this position, how do emerging neighborhoods have a chance to develop?

Is anybody out there listening?

UPDATE Since this incident, there have been a number of sales in this neighborhood over the $2M threshold. I forgot to mention in the first paragraph of this post that we also received calls from their underwriter telling us to bring down the value because they didn’t think the neighborhood could support the price.

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Development Is Goin’ Down…town

November 29, 2005 | 12:01 am |

Eugene L. Birch of the Brookings Institution just completed an analysis of population, household and income trends in downtown areas from 1970 to 2000 called Who Lives Downtown

Download full the report [pdf]

The study was based on 44 different cities whose results vary widely but show these trends:

  • During the 1990s, downtown population grew by 10 percent, a marked resurgence following 20 years of overall decline.

  • From 1970 to 2000, the number of downtown households increased 8 percent—13 percent in the 1990s alone—and their composition shifted.

  • Downtown homeownership rates more than doubled during the thirty-year period, reaching 22 percent by 2000.

  • Downtowns are more racially and ethnically diverse than 20 years ago.

  • In general, downtowns boast a higher percentage of both young adults and college-educated residents than the nation’s cities and suburbs.

  • Downtowns are home to some of the most and least affluent households of their cities and regions.

The results, if based on the past five years would likely show a more pronounced shift toward urban revitalization.

Should We Stay Or Should We Go (To The Suburbs)? [Matrix]
Urban Beats Suburban [Matrix]

Too Many Brokers Chasing That Elusive Listing

November 28, 2005 | 9:25 am | |

In the article this weekend So Few Properties, So Many Brokers [NYT] Nadine Broznan paints an accurate but bleek picture from real estate brokers entering the profession today. After several years of boom times, the future is less certain.

The Real Deal did one of its usual exhaustive surveys on brokers and agents [pdf] finding that in the top Manhattan ten real estate firms, 30% to 63% of their brokers had no listings.

For the most part, people entering the brokerage profession have missed the boom [Propery Grunt], no matter what happens to housing prices. There simply appears to be an oversupply of agents [Matrix].

For brokerage firms, it provides an opportunity to upgrade existing staff since every new agent creates additional overhead costs that has to be accounted for somewhere.

Out of Commission [Matrix]
Its More Than Shelter: Nearly 1 Out Of 10 Jobs Related To Real Estate [Matrix]

Affordability At The Hands Of Mortgage Rates

November 28, 2005 | 12:05 am |

Over the past 18 months, affordability has dropped despite increases in income growth and low mortgage rates [FNMA]. “The National Association of Realtors’ (NAR) housing affordability index is at its lowest level since 1991 (and, using our own calculations, affordability has fallen to the lowest levels since the early-to-mid 1980s in some high cost areas). The NAR first-time homebuyer index is at its lowest level since 1985.”

Fannie Mae’s economists note the cause for the drop in affordability is:

  • The rise in home prices.
  • Increases in investor/second home purchases
  • Looser overall underwriting
  • Popularity of low initial-payment ARM mortgages

Well, affordability is weakening, not because of the fact that mortgage rates are low, but because mortgage rates have been rising since mid-summer until a few weeks ago. Every notch upward that mortgage rates increase, knocks someone out who was on the fence (sorry, I wanted to say “who were on the bubble” like the Indy 500 qualifiers but that would be too dramatic.)

Affordability is basically a mortgage payment and how it relates to personal income. If income is stable, then affordability is all about the payment. As the payment rises due to mortgage rates, then people get knocked out for lack of qualifying. Its as simple as that.

As more and more people fall out of the market because they don’t qualify for their mortgage, there is less pressure on prices. That would be the expectation. However, in much of November, mortgage rates actually fell bringing more people back into the market as affordability increased.

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Fill In The Blank With The Latest Catchphrase: Housing “Expansion”

November 28, 2005 | 12:04 am |

Its been subtle, but there has been a change in housing market terminology over this past year. There have been several distinct segments to the trend, in terms of how what terminology is used to describe it.

Housing “Boom” [January to June]

In the first half of 2005, the media generally used the phrase “housing boom” to describe the vibrant state of the housing market. Several years of rising prices and success stories for brokers and builders seemed to fill the news.

Housing “Boom” = Housing “Bubble” [July to September]

Over the summer, during the barrage of bad news, including Katrina and Rita Hurricanes, spiking gasoline prices, worsening conditions in Iraq, political discord in Washington, growing inflation concerns and rising mortgage rates (wow, some major gloom and doom was abound) influenced the media to some sort of tipping point. Many of the articles during this period shifted from talk of a boom, with risk of a bubble, to if the bubble was going to burst.

Housing “Bubble” [October to November]

Lately, the housing discussion has firmly shifted to use of the word bubble as a key descriptor of the state of the housing market and the orientation became a matter of when the bubble will burst. This thinking seems to have its own momentum despite the significant change in many of the indicators that gave us reason for concern this summer.

For example, economic damage to the national economy from the hurricanes is now largely believed to have less significant implications. Mortgage rates have leveled off and have actually retreated lately. Gasoline prices have fallen sharply, core inflation has remained low and housing prices have not fallen.

Housing “Expansion” [December +]

Now the NAR is beginning to call the current real estate environment a housing expansion [Washington Post] Of course, a market characterized by more balanced conditions can not be characterized as an expansion.

Suggested dramatic titles for next phase (not necessarily correlated with actual events)

Housing “Bust” [?]

Housing “Black Hole” [?]

Housing “Katrina Effect” [?]

Housing “Rebound” [?]

Housing “Explosion” [?]

UPDATE January 29, 2006

Housing “Soufflé” [?] [See the Big Picture blog]

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Like Its Name Implies, Cond-ops Have Two Meanings

November 28, 2005 | 12:03 am | |

There is an excellent article on How Condops Differ From Condops [NYT] that discusses the two uses of the word and why they are different. I don’t know if this form of ownership exists in other parts of the country outside of New York, but if it does, I suspect its rare.

The Legal Entity
In the 1980’s, the housing boom created a hybrid form of ownership called the “cond-op.” This form allowed the developer (sponsor) to retain control of the commercial or retail space, usually at grade and/or keep the building from violating its 80/20 if the commercial units were throwing off too much income. [80/20 law allows co-ops their tax deductions like real estate has] It works like this. The co-op entity would be enveloped within one of the condo units (legally). If there were two ground floor commercial units, each unit would be designated as a condo unit. This way a 200 unit apartment building with 2 retail units could be converted to a 3 unit condo development. The co-op board would have no power over the retail units. To the buyer of a residential apartment, the co-op acts and functions as a co-op, because, well, it is one. The main difference being that it doesn’t have control over the retail units. We generally find no disparity or penalty in this configuration.

Flash forward to the current market.

The Marketed Entity
The term condo-op has morphed into something else. The limited availability of sites have stimulated developments built or converted on land that is leased. This form of ownership can not be condo because the land is not owned in fee simple. These new developments are legally developed as co-ops but have rules that are more flexible than typical co-ops and are often called cond-ops. Easier board approval, more flexibility in renting are among the inferences the term implies. In fact, new developments like Astor Place (445 Lafayette), actually use the term condo-op on the cover of their offering plan, when they are, in fact co-op apartments.

UPDATE: Changed Lexington to Lafayette above – sorry about that. 😉

Banks Made A Bunch, More Construction Lending, Homequity Loans Weakened

November 28, 2005 | 12:02 am |

The FDIC reported that [bank and thrift earnings set a record this quarter [FDIC]]((, above the prior record set in the first quarter. Other items of interest are:

  • Residential mortgage loan growth increased 3.6% over last quarter. (I’d consider this a solid increase.)

  • Growth in real estate construction was 7.2% and is accelerating. (This is reflective of the potential for an over supply of housing.)

  • Home equity loan growth increased by 0.8%, the smallest quarterly increase in 4 years. (This could be a clue to a weakening economy as homeowners cooled off their use of home equity accounts, which is largely credited with keeping the economy going.


More Fog Around The Lighthouse As Battle Of The Press Releases Runs Aground

November 28, 2005 | 12:01 am |

In last week’s post Cutting Through The Fog: Dependency On Proprietary Standards Is Not Good For Business [Soapbox], I referred to the strange press release from ACI actually announcing they did not renew their agreement with several vendors.

Apparently and Day One have released their own press release explaining their side of the story [Appraisal Buzz]. The press release headline “Accelerated adoption of MISMO & AI Ready standards makes Lighthouse format increasingly outdated” says it all and further indicated that ACI’s move would only affect 5% of the 40,000 appraisers that use their service.

This back and forth positioning between these vendors seems to drive home the point that proprietary formats for collaberation or exchange of data is not good for our industry because it makes all of particularly vulnerable to the health or strategy of the licensor. An industry open source format is the better way.

Can you imagine the commercial appraisal world without Microsoft Office? It can be unstable, buggy, expensive to upgrade and annoying to use at times but there are limited alternatives, primarily because both the user and the vendor must use the same software or have a working translator. Competitors were crushed a long time ago.

I am not happy with a business world without competition in software. Innovations and improvements wane over time. We all lose.

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Soapbox Breaks For Thanksgiving!

November 23, 2005 | 12:10 pm |

We’re off for the holidays starting NOW! Back on Monday, possibly sooner depending on the intensity of our indigestion.

The luckiest turkey on the planet.