Matrix Blog

Archive for February, 2006

Two Hands In The Cookie Jar: Banks Are Getting Closer To Entry Into The Real Estate Business

February 28, 2006 | 10:45 am | |

I wonder if the NAR, in some respects is regretting the housing boom. With all the income the industry has generated, it has also generated attention that probably isn’t beneficial to the trade group in the long run. Commissions, multiple listing service data, statistical methodology, believability as a resource, etc.

In the article NAR: Pittsburgh Condo Deal Puts Banks into Residential Real Estate [RISMedia] the National Association of Realtors contends that banks are getting into real estate despite regulations that prohibit this activity.

In a letter delivered last week to the chief counsel of the Office of the Comptroller of the Currency, the president of the National Association of Realtors responded to the recent defense by the OCC of its approvals permitting national banks to engage in new real estate and commercial activities.

They are also fighting Wal-Mart Bank’s application Because It Mixes Banking and Commerce [NAR]. [They] will actively oppose the application for federal deposit insurance by Wal-Mart Bank, a proposed Industrial Loan Company (ILC) headquartered in Salt Lake City, and requested the opportunity to testify at upcoming hearings. The Federal Deposit Insurance Corp. has scheduled public hearings in April in the Washington, D.C., area, and the Kansas City, Mo., metro area on Wal-Mart Bank’s application.

Since 2000, Realtors have opposed a pending regulation by the Federal Reserve and Treasury that would allow national banks to broker real estate and perform property management. Since 2002, Congress has blocked the regulation. It seems to be a matter of time before banks will have this option since every year this debate comes before Congress.

The NAR contends that by banks entering the real estate business, the safety and soundness of the banking system is at risk since it is a speculative investment. The idea posed is the the concentration of assets would be higher making the failure of one bank more critical to the financial system. NAR contends that the top 5 banks hold 45% of industry assets [Mortgage News Daily] and has a series of arguements why banks are a higher risk.

_Number of firms:_
Real estate – 98,000 to over 200,000 (depending on who is counting)
Banks – 8,000 to 10,000.

_Barriers to Entry:_
Real estate – usually less than $1,000 and a few weeks of studying time to obtain a license and enter the field;
Banking – large capital requirement.

_Taxpayer Risk and Historic Experience of Government Bailout:_
Real estate – none;
Banking – yes (historic evidence, S&L failures and RTC bailout.)

_Influence of Foreign Governments:_
Real estate – no;
Banking – large multinational corporations are subject to foreign government regulation.

_Consumer Data on Buying Habits and Possibility of Price Discrimination:_
Real estate – none;
Banking, -vast, often based on data mining of credit card purchase information.

_Cooperation with Competitors in the Sale of Products:_
Real Estate – yes, through MLS;
Banking – no.

_Degree of Regulation:_
Real Estate – minimal;
Banking – heavy.

_Social Promotion of Entrepreneurship, Women and Minorities, and Small Business:_
Real Estate – yes in every category;
Banking – yes in every category bus assessment is limited to owners of community banks.

Here’s a blog post on this issue from a banking perspective: ALERT: NAR’s New Threat from Mega-Banks – There they go again? There who goes again? [Inman] All I read into this most recent industry warning by the NAR is the voice of a threatened professional association that insists upon denying the consumer the choice of any other ownership structure for real estate brokerage other than the status quo – Realtor-centric. Drill down and you will find a true fear that if banks were to be in the real estate brokerage business about the last professional association they would insist their operators belong to would be the NAR.

This is all very interesting and well-laid out on both sides except:

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NAR says that banks are not a good idea because they place a higher risk on the banking system by being more speculative.

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Banks (more than just the included post on Inman) say that NAR has a monopoly on home sales and keeping banks out of the process only extends broker control further.

Confused? Be glad you are not a regulator. Its tough to see through the spin. At the end of all this, I think the banking lobby will win out over the broker lobby. They seem to have the OCC and momentum on their side.

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Real Estate Blogs: Speaking To People We Don’t Know, For Reasons We Can’t Explain

February 28, 2006 | 8:56 am | | Public |

Here’s a couple of press hits that covered Matrix recently that crushed us with traffic. I appreciate everyone’s interest in checking in with Matrix, especially all the people I nag incessantly (you’re not off the hook).

Outstanding On Our Soapbox This Week: What a Difference a Decade (Or Two) Makes – The Slingshot Is No Match To The Hammer

February 28, 2006 | 8:41 am |

In this week’s Solid Masonry weekly post on our other blog, Soapbox, [Solid Masonry] What a Difference a Decade (Or Two) Makes – The Slingshot Is No Match To The Hammer This week Appraiser John Mason gets more “big picture” on us, discussing the state of the tenant in the Big Apple.

At The Core Of Inflation, Housing Sales Are Merely Rentals

February 28, 2006 | 8:28 am | |

In Dr. Irwin Kellner’s commentary Inflation is greater than you think: Focus on ‘core’ rate is foolhardy [MW], he indicates that The Fed likes core prices because, by excluding food and energy, they are supposed to provide a better measure of underlying inflation trends. After all, both food and energy prices are volatile, and tend to be influenced more by the weather and/or by geopolitical developments than by the state of the economy. Dr. Irwin Kellner is chief economist for MarketWatch. He also is the Weller professor of economics at Hofstra University and chief economist for North Fork Bank.

Kellner has serious issues with the following components of core inflation:

  • We consume food and energy every day and it shapes our attitudes about inflation.

  • Energy prices have been trending up in recent years and higher costs are becoming part of our daily lives.

  • And most importantly, since the government considers housing an investment rather than a consumable good it uses the rental equivalent so it is treated differently, than say cars and electronics. Here’s the problem – in a typical market, the faster housing prices increase, the slower rents increase, moderating price increases.

In New York, rents actually moved in the opposite direction of housing prices for much of the past 5 years. Perhaps the same logic is used for co-ops by the Department of Finance, who values co-ops by rental values rather than by their sales prices.

Floyd Norris, in his article On Wall Street, the Inflation View Is Rosier Than It Is on Main Street [NYT] he touches on the same point. The government estimates what rents would be on homes occupied by owners, and ignores sale prices. The 4.3 percent rise in housing costs over the last 12 months is higher than the rent increase of just 2.5 percent, largely because the cost of heating homes is up.

Another clear indication that housing is inadequately represented in the CPI stats is based on the comparison between CPI and the Office of Federal Housing Enterprise Oversight (OFHEO) housing figures. CPI says housing prices are up by a third since 1995 and OFHEO says prices have doubled.

In Norris’ column, an expert estimates that overall CPI, if measured before the government changed the methodology in 1982, would be around 6%, rather than 3.3%. This comes full circle because mortgage rates are influenced by CPI, which is influenced by the way the government tracks housing prices.

Source: NYT

I’m getting dizzy…

Like seasonal adjustments, I am always wary of statistics being adjusted on my behalf.


[Solid Masonry] What a Difference a Decade (Or Two) Makes The Slingshot Is No Match To The Hammer

February 28, 2006 | 6:44 am |

John Philip Mason is a residential appraiser with 20 years experience and covers the Hudson Valley region of New York. He’s a good friend and a true professional who provides unique insight to appraisal issues of the day. This week he gets more “big picture” on us, discussing the state of the tenant in the Big Apple. Here is his weekly post called Solid Masonry. Jonathan Miller

In a recent New York Times article, Tenant’s Say They’re Lost in Dust of Conversions, by Charles V. Bagli and Michael S. Schmidt, it becomes all too clear how the balance of power has shifted in the world of New York City real estate. Bagli and Schmidt reveal the vulnerability and plight of many rental tenants in today’s environment. The laws have changed, the economic stakes are greater than ever and the new creed is as unapologetic and one-sided as the old one was. In the article the tenants are cast aside, with little or no recourse and it becomes clear the balance of power lies firmly in the hands of the landlords. As a result, the appraisal industry continues to readjust its analysis of projected rent rolls and gross sell out values with an equally aggressive view of the upside potential of such properties

In the 1980’s the mere presence of better known names like Donald Trump, Larry Silverstein, William Zeckendorf and many other real estate moguls sent shock waves through the various communities they saw fit to impose their projects upon. (That sounded a little more ominous than I intended, but a little drama is good.) These giants leaped from project to project, each leaving his/her signature on the New York City real estate landscape. Among these giants, there were nameless titans with power so great they were able to stop multi-billion dollar projects dead in their tracks. These titans were not necessarily affluent, highly educated or even well connected. At times they comprised a somewhat odd cast of many, but quite often they numbered no more than one or two individuals. Their motives and tactics could be angelic, materialistic or down right confusing. Not long ago these nameless powerhouses of the New York real estate world were rent stabilized and controlled tenants.

Remember the days when skyscrapers were built around a single tenement building, containing one lowly tenant? How about the numerous conversion attempts thwarted by well organized tenants waiving their “no buy” pledges? And how many stories did we see in the media exalting the David and Goliath type tales of tenants receiving such favorable treatment within the New York City court system? It almost seemed a patriotic duty to stand up for the little guy.

What a difference a decade or two makes. In less than 20 years the political and legal climate has shifted almost 180 degrees. So startling is the change, it would seem we have a new religion, which has spread far and wide. This may explain why everything including cruise ships seems to be going condo, why the Supreme Court recently ruled against the ownership rights of individuals on behalf of a large private enterprise and why the City of New Orleans may never be rebuilt as it was. What makes this even more amazing is this transformation has also taken place in one of the most liberal bastions of the nation, New York City. It has always been a city of stark contrasts, but they were hidden amongst the many subtle shades of gray. Likewise New York has always been a city full of Davids and Goliaths. Though now it becomes all too clear, the slingshot is no match to the hammer.

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Checking Insulation To Protect Appraiser From Production Staff

February 27, 2006 | 8:38 am |

John Taylor is the president and chief executive officer of the National Community Reinvestment Coalition in Washington who wrote How to Insulate Appraisers from Production Staff [American Banker]. He states that:

We believe that appraisal inflation is so pervasive that it requires this type of action. Over 8,000 appraisers have signed a petition circulated by the Appraisal Institute alerting the public to this pressure and warning them that their home may be overvalued. A recent survey of appraisers found that half had been pressured to increase appraisals by 10% or more.

His suggestions to reduce appraisal pressure is to:

  • Restructure internal operations so that loan officers do not select or interact at all with appraisers or approve them for rotating lists.
  • Isolate mortgage brokers from the appraisal process in the same manner.
  • Hire independent appraisers or appraisal management companies. Do not hire an appraisal company that is a subsidiary of the lender ordering the appraisal or of the title company supplying the title, because all stand to gain financially from a higher home price.
  • Never depend solely on automated valuation for an appraisal; each home must be seen by a qualified appraiser.
  • Sign a code of conduct developed by the Center for Responsible Appraisals and Valuations, agreeing to resolve differences between themselves and appraisers through the center’s arbitration pro-cess.

Federal regulators, such as the Office of the Comptroller of the Currency, have urged lenders to ensure the independence of appraisers from their loan production staff. Creating this independence, however, requires more than a few superficial steps that an aggressive loan production staff can easily dodge. Lenders must build a corporate structure that does more than simply hide the conflict of interest.

Currently, there is no promising solution for this problem. Associations that represent lenders and appraisers generally tout self-policing or the pending Responsible Lending Act (HR 1295) bill (which is currently stalled in Congress), but these issues amount to window dressing since the problems are inherent in the structure of the lending system and don’t address appraiser indepenedence.

A potential solution is not politically popular since few representatives want to go on record with a solution that will potentially increase loan application costs (near-term) and reduce turn around times.

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Not Everyone Is Ready For An Appraisal Of Reality

February 27, 2006 | 8:13 am |

As comedian Robin Williams once said:

Reality, what a concept

Kenneth Harney writes that Appraisers supply a dose of reality [LA Times].

See Not Everyone Is Ready For An Appraisal Of Reality [Matrix]

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With A Flag, An I-Beam and a Christmas Tree, The Party Is Just Getting Started

February 27, 2006 | 12:06 am | | Milestones |

Ever since I was a kid, I remember seeing and reading about Christmas trees on top of buildings under construction but they were not quite finished. I also remember seeing an American flag and there was usually a ceremony of some kind that was covered in the newspapers.

There has been a tremendous amount of construction in recent years and I started thinking about topping out ceremonies:

What is this all about? Why a tree?, and Why was I looking up instead of watching where I was walking?

According to Modern Steel Construction / December 2000 [pdf]

When or how it started, but the tradition of ‘Topping Out’ has become a cherished custom of Ironworkers whenever the skeleton of a bridge or building is completed. Topping Out is a signal that the uppermost steel member is going into place, that the structure has reached its height. As that final beam is hoisted, an evergreen tree or a flag or both are attached to it as it ascends.

This tradition of ironworkers is most closely associated with the International Association of Bridge, Structural, and Ornamental Ironworkers union in Washington, DC.

“Topping out” is the term used by ironworkers to indicate that the final piece of steel is being hoisted into place on a building, bridge, or other large structure.

The project is not completed, but it has reached its maximum height. To commemorate this first milestone the final piece of iron is usually hoisted into place with a small evergreen tree (called a Christmas tree in the trade) and an American flag attached. The piece is usually painted white and signed by the ironworkers and visiting dignitaries (figure 1). If the project is important enough (and the largesse of the contractor great enough) the ceremony may culminate in a celebration known as a “topping out party” in which the construction crews are treated to food and drink.

For those who are into Scandavian mythology here is the History of the “Topping Out” Ceremony [Columbia University] via The Ironworker magazine.

Topping Out Bear Stearns NYC

Mohawk Indians are the most well-known ironworkers and are close associated with topping out buildings.

Here’s a sampling of local coverage for a typical event:

Topping Out at 7 World Trade Center
Topping Out At The Ukrainian Museum’s Top Project
Topping Out the Blanton: That tree on the roof? Means the new museum is A-OK.
Vought-Alenia plant to be topped out

but its not limited to the US…

New unit at Northwick Park Hospital finished [UK]
New home to help juveniles re-integrate [HK]

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[Getting Graphic] Genius On A Napkin: Housing Boom Phase Diagrams

February 27, 2006 | 12:05 am |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related graphic(s).

Click here for full post [Rutledge Blog]

Enlarge graphic

Source: Rutledge Blog

Although I consider myself geek-like, the chart Dr. Rutledge provides is a bit over my head but his explanation is clear. (make a mental note – consider changing this post to [Getting Text])

Dr. Rutledge’s post was written in the spring of 2005 and the comments he makes are very relevant today.

A drop in interest rates will make a permanent increase in housing prices but, over time, the growing housing stock will mitigate some of the price and construction pressure, which means the initial burst of activity, and possibly of price, are likely to moderate somewhat over time. To an information theorist, the initial spike in price is a way of amplifying the initial information signal that housing is now scarce in order to get everybody’s attention so they get out their hammers and build more houses.

So interest-rate induced housing inflation is largely a one-time event. It is not property inflation. It is not a housing bubble.

Housing inflation, as opposed to one-time increases in home prices, happens when there is a continuous increase in demand caused, for example, by systematically inflationary monetary policy. We do not have that today.

Housing bubbles pop when a sudden reversal of interest rates, or a sudden reduction in the availability of mortgage financing, causes a sudden, one-time, drop in demand. I don’t think that is going to happen either. Inflation today is likely to remain low for some time.


[Getting Graphic] Housing In The Circle Of Economics

February 27, 2006 | 12:03 am |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s). This week we have a two for one…

In this post from last summer The US Trade Deficit is Unsustainable [Axis of Logic] Bud Conrad shows how dependent the US housing market and US government deficit spending is on re-investment by foreigners. This is consistent with the negative savings rate. Americans are spending more than they make but this activity is expected to reverse as the housing market eases as consumers reign in spending and begin saving.

The following charts show the role of housing in the economic cycle.

A basic view of the economy as show by Axis of Logic: _Households earn the wages they spend on the goods and services from businesses._

Source: Axis of Logic

The next chart adds that _consumers spend a portion purchasing foreign goods. The foreigners then recycle the dollars they collect from this trade into the US government debt by buying Treasuries and into Agency debt of Government Sponsored Enterprises like Fannie Mae, which then provide money for housing._

Source: Axis of Logic

Albeit simplified, these charts help demonstrate that:

Foreigners have funded our housing boom and provided enough credit that the growing federal deficits have not driven interest rates up.


Not Everyone Is Ready For An Appraisal Of Reality

February 27, 2006 | 12:01 am |

As comedian Robin Williams once said:

Reality, what a concept

Kenneth Harney writes that Appraisers supply a dose of reality [LA Times].

What will your home be worth if unsold inventories of houses turn into a glut and relistings with price reductions become routine?

For most consumers, the ultimate answer about value will come from the appraiser hired by the purchaser’s mortgage lender.

For consumers, he provided insight about appraisers from several appraisers he interviewed (sans moi!):

  • stay in touch with multiple sub-segments – markets behave differently

  • have a lot of input from [agents] – they are on the front lines

  • hire a licensed, long-established appraiser as a consultant for an hourly fee – sometimes input from a non-biased source can put a buyer or seller at ease without a full appraisal.

  • good appraisers ignore pressure and will only change values if provided with comps that were missed that are better than those already submitted – the pressure appraisers get from lenders, mortgage brokers and mortgage bankers is relentless – if you want an unbiased opinion, you might stay away from appraisers who do a high volume of work for mortgage brokers

  • for sellers and buyers in softening markets: “Just be realistic.” Don’t be greedy – its going to take a while for all the parties to adjust to the change in conditions

  • As a buyer, don’t expect sellers to bleed for you – there may be not as many competing buyers but you are not the only buyer

  • And sellers: Don’t blame the messengers — appraisers or realty agents – respect the pressure they are under

Conclusion — Take a deep breath and listen to the valuation expert if you want to know what a property is worth.

I look at a valuation expert as:

  • someone whose compensation is not determined by whether or not you buy the property
  • years of experience
  • access to comprehensive information

In the article Bogus appraisals stress housing market [Kansas City Star] the author states An independent and unbiased appraisal — once considered the bedrock of any home sale or loan — today is often built on shifting sands, according to concerned appraisers in Kansas and Missouri as well as nationwide.

Appraisal fraud is relatively easy to hide because most consumers have no idea how an appraisal works. Many consumers never see an appraisal — though they pay for them — unless they ask for one at closing. But while they may appear subjective, honest appraisals are supposed to adhere to well-defined principles.

As the housing market eases, the phrase rising waters float all boats won’t apply anymore as consumers, lenders and regulators will begin to get the message that something has to be done.

For more information on appraisal issues of the day, check out our blog [Soapbox], dedicated to appraisal issues of the day.


Gentrification: Too Much Of A Good Thing?

February 27, 2006 | 12:01 am | Public |

[The Stamford Review] makes the well-documented conclusion that New York City may face a total build-out crisis in seven to 10 years, reported in its most recent issue, all the more alarming.

Source: 70’s Alphabet City by

This press release provides an overview of the current issue [Stamford Review]. Stamford Review editor Larry Sicular states:

The city depends on housing construction to help support its economy, but by the time a child born here today reaches the fourth grade there may not be any vacant land left for development,” said Larry Sicular, publisher/editor of The Stamford Review. “Focused on following the strengthening or weakening real estate market, few people have stopped long enough to look forward to the very difficult planning decisions facing us.

I have known Larry for more than 20 years and I jumped at the opportunity to contribute two articles to the current issue:

Here are the portions of the press release that pertain to the Gentrification article:

  • As Manhattan has gentrified, pricing differentials among neighborhoods like Tribeca and the Upper West side have dramatically slimmed down, by 35% since 1989. (Miller, Miller Samuel Inc.)

  • High land prices are forcing developers to create bigger, more profitable units, but demand has shifted to mid-sized units. A growing supply of unsold, large, pricey units is the result. (Miller)

  • New developments in emerging New York City neighborhoods now cost almost as much for homebuyers as those in established markets. (Miller)

Here are the portions of the press release that pertain to the Media article:

  • In 2005, the media were so determined to find bad news about a housing bubble that they oversimplified and drew misleading conclusions about market statistics. (Miller)

  • Now, after two consecutive quarters of quiet markets, the media has adjusted its terminology from a “bubble ready to burst” to a “soft landing” or a more “normalized” market. (Miller)