Matrix Blog

Archive for July, 2006

Affordable Commentary: The Real Estate Economy Keeps Churning And It Doesn’t Care About Your Opinion

July 31, 2006 | 9:50 am | | Public |

There has been a lot of discussion, criticism and debate about what is going on in the housing market. In fact, the flow of information on the topic has been phenomenal. However, what this debate has garnered, is the need to take sides. Right and wrong. Truth or fiction. Moral or immoral. Be part of the Real Estate Industrial Complex or not.

I have been thinking about this for a while, and its confirmed each week after I post my weekly column Three Cents Worth in Curbed. There are a few commenters who sound pretty smart but seemed obsessed with the idea of taking sides. You are either for or against their position and its personal. However, whatever position you take really has no bearing on anything.

The recent ruling by Chicago City Council to pass a law on the minimal acceptable wages [SunTimes] to be paid by big box stores is a prime example. I lived in the Windy City for a few years when I got out of college and I know how Chicago politicking can get pretty intense. However, the politicians in this issue missed the point. Its not about the morality of Wal-Mart and Target paying a living wage to their employees (which they should), its about economic reality. Raise wages to an unacceptable level, and the companies go elsewhere. Period. Economic forces are not about right and wrong. Businesses go where the money is. Create the right economic environment and they will stay.

Then I happen to read The Stalwart’s excellent post The Market Doesn’t Care About Your Opinion which rings so true with the real estate market.

In a real estate example, take bubble blogs at one end of the spectrum and the National Association of Realtors at the other end.

Bubble blogs can generate a large amount of traffic and the volume of commentary and amount of camaraderie is incredible. Some bloggers will simply post “Have at it” and 200 comments will be posted about every conceivable position about housing bubbles. Everyone seems to have an opinion on the topic of housing bubbles and it can be deeply personal. As an aside, it would be interesting to know if the majority of bubble blogs are run by renters? They seem to be.

The NAR has done a poor public relations job this go ’round with its spin. But as far as spin goes, what do you expect? They are an industry trade group – that’s their function – all trade groups spin. Their spin during the transition from the housing boom was not lower in quality. The process is so much more transparent than ever before that they can not be as misleading as in the past and get away with it. I wonder if they every take their own advice?

However, at the end of the day, to debate whether housing prices are too high or not won’t change anything. That’s right up there with watching the local news and hearing about all the local fires and tragedies that day and then talking to your friends about it.

If housing is less affordable today than 5 years ago, then the argument should not be whether or not this is in fact is fair or moral, etc. Buyers and sellers are not being forced to buy or sell (in most cases) in a higher priced environment.

Real estate markets keep moving up, down or sideways and with that so does affordability. It does not matter what side you are on because the real estate economy does not care.

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[Getting Graphic] A Familiar Refrain: Sales Down, Inventory Up

July 31, 2006 | 12:03 am | |

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

In Floyd Norris’ Many Homes Are on the Market and Sales Numbers Are Declining [NYT] he recaps the release of recent home sale data this week which basically said that the number of homes, while still near record levels, can’t keep up with the number of homes being added to inventory.

Sales of 1-family homes are down 4.4% over last year while their inventory is up 33%. Co-ops and condos are down 6.6% and inventory is up 61%.

For the past six months, I have been saying that this summer, or the 3Q 2006 will likely be the bellweather for what the real estate market is really doing. The 2Q 2006 market sees the largest increase in the number of sales and price appreciation. Floyd Norris is really saying the same thing. We can now get to the bottom (literally?) of the whole question which is, what is going to happen to the real estate market?

WHEN the American economy fell into recession five years ago, it was the strength of the housing market that kept the downturn short and mild. Home sales kept rising throughout the downturn, and then took off when the recession began.

But now home sales are falling and the number of unsold homes is at the highest level ever. Housing starts are starting to fall, but remain at a high level by historical standards. If sales do not pick up this summer, when sales are usually seasonally strong, it could be a sign that prices are going to come under pressure and lead to a much larger decline in housing starts.

Source: NYT

2Q 2006 Manhattan Market Overview Available For Download

July 31, 2006 | 12:02 am | | Public |

The PDF version of the 2Q 2006 Manhattan Market Overview [Miller Samuel] that I write for Prudential Douglas Elliman [PDE] is available for download. I have been writing these market reports for them since 1994.

In addition, you can see the methodology that went into the report including the neighborhood boundaries and the type of content we have available.

You can also build your own custom data tables using the aggregate report data (from 1Q 89 through 2Q 2006).

_An excerpt_

…The phenomenon of rising prices and declining sales is a classic sign of a market in transition. The market has entered a period where the sellers no longer have a clear advantage in the typical sales transaction. Buyers were expecting a deep discount on all transactions while sellers remained fairly firm in their pricing. As a result, the number of sales dropped as the buyers who were resistant to rising prices simply chose not to participate, while those who stayed in the market paid record prices on average. The modest uptick in mortgage rates since the beginning of the year tempered demand as both existing and new development inventory was rising. While inventory levels are the highest they have been in ten years, the selection for buyers has not improved as much as the inventory numbers would suggest as sellers have not yet responded to the weaker demand. There is still a substantial portion of listings that are priced as if the market was seeing double-digit annual appreciation that occurred over the past several years. As a result, it is taking longer to sell an apartment and there is generally more negotiability…

Download report: 2Q 2006 Manhattan Market Overview [pdf]

From The Garden State: The Otteau Report: June 2006

July 31, 2006 | 12:01 am |

[This monthly market report is provided by Jeffrey Otteau of the Otteau Appraisal Group who also authors a series of widely followed quarterly market reports on the New Jersey real estate market. This information is collected from various sources including Boards of Realtors and Multiple Listing Systems in New Jersey.]

I have known Jeff for many years and consider him one of the leaders in the real estate appraisal profession. He has taught me a lot about quantitative real estate market analysis. -Jonathan Miller

Click here for a larger image [note: PDF]


June is an important month for the residential real estate market as it represents the traditional end-point of the Spring selling season and typically sets the high-water mark for home sales in any given year. Thus, the residential market in New Jersey had much at stake as any hopes for a market comeback would fall heavily on the June sales performance.

In June, contract-sales activity ran 9% below May and 24% below June 2005, continuing the pattern set earlier this year and dimming hope for a market comeback any time soon. From an inventory perspective, the number of unsold homes on the market increased by 4% in June adding further to an already saturated market. Year-to-date comparisons indicate a 17% decline in Contract Sales and a 70% increase in Unsold Inventory when compared to last year at this time. Some encouragement can be found in the fact that Unsold Inventory increased by only 4% in both May and June, as compared to a much higher increase in the preceding months of January (+15%), February (+12%), March (+13%), April (+12%), giving some hope that inventory will stop it’s upward spiral. At the same time however, even a modest increase in Unsold Inventory is detrimental to the market given the current high inventory levels.

Looking ahead, the Summer selling season typically brings gentle but steady declines in buying activity followed by more pronounced dips during the Fall and Winter seasons. Add in the effects of rising mortgage rates, record high energy prices, and the erosion of consumer confidence towards the future of the housing market and there’s no reason to expect a rebound any time soon!

From a price perspective, there is mounting evidence that home prices will decline over the short term as motivated sellers make business decisions to accept a lower selling price in exchange for a quicker sale. On the New Construction front, the myriad of sales incentives ranging from discounted pricing on upgrades, mortgage rate buy-downs and other financial incentives are the market equivalent of price reductions which will steer the overall residential market to a lower price point. Given that the New Jersey Housing Market realized an 87% increase in home prices from 2000 – 2005, the adjustments now taking place come as no surprise. Nonetheless, expect a bumpy ride over the next few years as the market struggles to restore an affordability balance in the face of rising mortgage rates and energy prices.

Here are 2005 annual stats.

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Inman Awards Announced

July 28, 2006 | 6:44 am | |

Congrats to Noah Rosenblatt at for winning this year’s Most Innovative Real Estate Blog award. He’s got a refreshing approach to the interpretation of the NYC real estate market from someone on the front lines. He won out over (Rain City Guide, The Walk-Through (New York Times), Center for Realtor Technology, SocketSite and of course, Matrix (But I’ve already told you that before).

Congrats to all the other winners, especially Property Shark, Trulia and October Research Corporation since I am directly familiar with what they do and how they do it. Impressive!

Honestly (see Inman theme), my heart aches to have missed out on the trip to Real Estate Connect San Francisco 2006 this year, but alas, too many things on my plate at the moment. Especially the theme: Is Real Estate Ready for Honesty? (What a concept.)

I definitely plan to attend Inman in New York, and hopefully make it out west next year.

Congrats to the other winners at the conference. For a housing market that is – not what it was, its inspiring to see the quantity and quality of innovation that is out there. Truly an exciting moment in real estate technology.

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[On Your iPod] Bond Market May Have Bottomed Out (Mortgage Rates May Have Topped Out)

July 28, 2006 | 6:15 am |

In PIMCO bond giant founder Bill Gross’ monthly Investment Outlook column this month, The End of History and the Last Bond Bull Market, after expressing his excitement for his new iPod, (his IO columns have been available as a downloadable podcast format for quite a while now and worth listening to) has basically concluded that the bond market has bottomed out (bond prices low = mortgage rates high) and mortgage rates will fall.


“The tightening cycle in the U.S. seems to have run its course, primarily because of its effect on housing and related repercussions on consumer spending and economic activity.”

Another key point.

House price booms are typically preceded by a period of easing monetary policy with FF rates bottoming out about three years before house prices peak. Rates then reverse quickly (after the peak) in response to falling GDP growth.

PIMCO has observed that the weakness in the housing market this year is understated and that prices in many local markets are actually declining.

2nd quarter GDP results are to be announced today and it is expected to show a fairly sharp decline in the annualized rate (although still healthy), from 5.6% in the 1st quarter, to around 3% 2.5% [update] in the 2nd quarter. Consensus says that GDP will continue to fall through the end of the year, one of the clearest signs that the housing market is cooling our jets.

A weaker economy will stop the Fed tightening and may be forced to begin reducing rates in 2007 (I believe so) because the Fed has overshot their target. PIMCO believes that mortgage rates will fall as a result.

This doesn’t mean another real estate boom, however, rather this would more likely be help to shore up the damage to the housing market caused by rising rates which in turn weakened the economy. In housing markets not in bad shape, for example those with low speculative activity, could see a modest recovery.

A Weakening Economy (If It Is), Has The Makings Of A Refi Boom In 2007 (If It Does) [Matrix]

[Getting Graphic] Beige Book Paints Less Rosey (Blue) Colors For The Economy

July 27, 2006 | 11:13 am | |

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


Click here for full graphic

The Beige Book was released today from the Federal Reserve, an anecdotal description of the regional economies by the 12 regional banks. The language has been changing since the release of the last few reports. In Jeremy Peter’s Growth Slowing Across the Country, Fed Regional Reports Say [NYT].

Read the report [Federal Reserve].

Although the Beige Book does not report stats (thank goodness, we have enough of those), it is thought to provide some insight as to what the Fed might be thinking. The weakening economic conditions may be a signal that the Fed is nearly done with their systematic rate increase strategy of a 25 basis point increase that started in June 2004.

While the commercial real estate market was reported to be strong across the country, the residential housing market has slowed in nearly all regions with two exceptions: the Dallas region, which reported strong demand and robust construction; the St. Louis region which indicated that the number of sales had not changed.

The weakening residential real estate market is characterized by the declining number of sales, rising inventory and stagnant prices.

[Disclosure: I am one of interviewees for the New York Region]

Economically Speaking, Its Beige [Matrix]


[Curbed] Three Cents Worth: That $2 Million Bedroom

July 27, 2006 | 11:02 am | | Charts |

Its Wednesday, so its that time of the week to provide my Three Cents Worth as a post for Curbed, and I have it on good authority that they prefer to sleep on a couch.

Three Cents Worth: That $2 Million Bedroom

Previous posts can be found here.

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[Commercial Grade] If It’s Thursday, This Must BeCanarsie?

July 27, 2006 | 10:51 am |

Commercial Grade is a weekly post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. Today John talks about the misuse of the word “expert”.

Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is, on Thursdays, one of the smartest guys I know. …Jonathan Miller

I remember going on a job interview many years ago, where the interviewer, the owner of a small fee shop, chewed me out for calling myself “an appraiser” with only two years experience. He snarled that an appraiser is one who gives an “expert opinion” on property value. He scared meI didn’t want to work for him!

Some 20 years later I still vividly recall this interview though, because it recently dawned on me that he was absolutely correct. This business (profession?) is full of state licensed young bucks that appraise a shopping center in one state on Monday, then head hundred of miles away on a Thursday to appraise an office building in a totally different market. Getting paid on a “fee split” basis (time is money!) they race through the market snapping photos of comps that they may have begged off of a local appraiser, then run to town hall to look up the assessments and zoning data.

Experts? Hardly. They are going through the motions of “the appraisal process”, but the majority of these appraisers have neither the experience or market knowledge to render a truly “expert” opinion. I know..I used to be one of themand I can tell you at the end of every assignment I would pray that I didn’t miss anything critical in my market blitz.

The internet has put market data in easy reach of all appraisers..even if they are thousands of miles away. However, there is no substitute for being a real local expert, having the years of experience and intimate knowledge of the local market.

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[Sounding Bored] Getting Shamelessly Aggressive

July 26, 2006 | 7:11 am | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This time I wonder what is in a name.

The other day, I was doing research about the appraisal profession in response to the WSJ article on Saturday that covered appraisal inflation. My post No Smoking Gun: Appraisal Inflation Is More Widespread Than You Think [Matrix] covered a lot of issues regarding the problems with the current state of the profession.

In the process of researching that post, I came across an appraisal firm I am not familiar with and have no firsthand knowledge of their quality and reputation.

I was only interested in the selection of their company name: Aggressive Appraisals -(scroll to bottom of their page).

One of the basic rules of USPAP is not to mislead the reader. I suspect that includes the name of an appraiser’s firm?

The term “Aggressive” suggests Of or relating to an investment philosophy that seeks to achieve above-average returns by accepting above-average risks. From the definition, the name could suggest that they take above average risks to benefit their client’s return.


Read the marketing copy on Aggressive Appraisals site:

  • 24-Hour Turn Time! – How much research can be done in 24 hours considering that the inspection would likely be the day after the report would be ordered from the bank.
  • Additional Bank Conditions Usually Done Same Day – They must get a lot of addenda requests since it is featured in their advertising so prominently. This also illustrates how the review function is now fairly mechanical and doesn;t have a lot to do with the overall quality of the report.

This is the direction the residential appraisal profession seems to be going in.

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Municipal Employees: Housing Market Could Catch Fire, Literally

July 26, 2006 | 6:42 am |

There was an interesting article in the LA Times today Firefighters Are Priced Out of the City They Protect about how firefighters have 90 minute commutes or more because they have been priced out of the markets they serve. In Montecito, California, adjacent to Santa Barbara, a 2nd year firefighter makes $75,000 per year while the average home prices are $2,300,000 and rents are too high to be affordable.

The same goes for teachers, police, ems, postal workers, prison guards and others in many communities. They simply can’t afford to live in the towns they serve [WaPo].

The is a nationwide problem that was made worse by the housing boom. Its been an issue for years as evidenced by this article written in 2000 in Realty Times.

One quirk, admittedly insignificant, relating to this issue indirectly that my family has experienced first hand. In my home town in Connecticut, many of the teachers live 45-60 minutes away. My kids will have snow days when there is no snow or very little accumulation since many of the teachers live further inland away from Long Island Sound and often get significantly more snowfall than areas on the coast.

More Square Feet Than Beaver Cleaver Had

July 26, 2006 | 6:16 am |

Although the average family size has contracted by 20% since 1970, the average home size has increased by 50%. Les Christie’s fun article Honey, I stretched the house — again [CNN/Money] provides some insight on what has changed in the average house (hint: its not just square footage).

Here’s a few stats on square footage and amenities that have changed as a reflection of consumer tastes changing:

1973: 40% had less than 2 baths
2005: 5% had less than 2 baths

1988: 11% larger than 3,000 square feet
2005: 23% larger than 3,000 square feet

1950: 90 square foot average kitchen size
2005: 285 square foot average kitchen size

1973: 23% had 4 bedrooms or more
2005: 39% had 4 bedrooms or more

1973: <50% had air conditioning
2005: 89% had air conditioning

1971: 39% had 2-car garages
2005: 84% had 2-car garages

Who says consumer needs don’t change?