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Archive for August, 2006

Slow News Cycle = More Housing Coverage = More Confusion

August 31, 2006 | 6:26 am |

With the dog days of summer wrapping up (my kids start school today), I looked back over the month of August and concluded that the housing market coverage seemed to be over blown relative to what change actually occurred, especially in the last few weeks.

As a simple test, I used Nielsen’s BuzzPulse to search on the word “housing” and sure enough, we have a spike in “housing” discussion. This of course doesn’t capture big media’s coverage but since quite often blog content is an off-shoot of big media content, my gut seems to be right.

In other words, while the housing market has weakened nationally, the media coverage of the weakening conditions seemed currently seems disproportionate. This happened last year at this time as well, when including the word “bubble” was an automatic heavy does of eyeballs on the article. This is not in any way to suggest that housing is not experiencing difficulties.

Nationally, inventory is rising, demand is falling, appreciation is waning, yet nothing significant or new really new happened this summer other than the fact that mortgage rates have fallen since July.

Mathew Hougan of Index Universe concludes just the opposite in his article Worse Than It Seems?

The housing market feels like its falling apart. The newspapers are full of stories about falling prices and rising inventories. Where I live, “price reduced” signs are popping up, and some houses have been on the market for more than a year.

Yet housing statistics are more rosy than his first hand experience. He cites a quirk in statistics of seller concessions or incentives that is not captured in sales prices that may be the cause national stats to appear better than they really are.

Here’s the problem with all of this. Local impressions may or may not correlate with national statistics.

Real estate is local.

Last year at this time we had the hurricane devastation. At least this year, thankfully, so far we don’t.


Affordability Impacted More By Pricing Than By Mortgage Rates

August 30, 2006 | 7:43 am |

In David Berson’s weekly commentary this week he discusses how housing affordability falls as rates and prices increase [Fannie Mae].

There is an inverse relationship between mortgage rates/housing prices and affordability. Rates and prices rise, affordability falls. Nothing new here. You have less disposable income to buy other things or you don’t make the qualifying ratios in order to obtain financing.

The NAR housing affordability index measures the share of the median-priced house (as defined as the median price of existing single-family homes sold in the monthly NAR home sales survey) a family earning the median income (as defined by the U.S. Bureau of the Census) can afford at the prevailing mortgage interest rate and using standard underwriting criteria. The prevailing interest rate is the effective rate on loans closed for existing homes from the Federal Housing Finance Board’s Mortgage Interest Rate Survey. The calculation also assumes an 80 percent loan-to-value ratio and a qualifying housing-to-income ratio of 25 percent.

These standards are a little outdated due to the 80% LTV and 25% ratio. There is a significant number of sales that relied on 90+% LTV’s and 33%+ H to I ratios. Ease of financing one of the triggers for the recent housing boom. Nevertheless, affordability was kept in check as prices increased because it was all about the monthly payment and not about the down payment.

What I find fascinating with the chart is the idea that affordability would be virtually the same today as this time 3 years ago had housing prices remained flat. If rates had remained constant, affordability would have dropped over the past 3 years.

In other words, the rise in housing prices is the bigger culprit in declining affordability, not the uptick mortgage rates.

Its an interesting concept because I am often asked what the mortgage rate threshold is before it causes a correction. I have been unable to come up with an answer I am comfortable with and perhaps this is why.

Note: Berson’s links lasts one week. After 9/6/06, go here and search for his 8/28/06 post.

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This Week’s Blog Marketing Prowess: Framing

August 30, 2006 | 7:18 am | | Public |

One of the better ideas for marketing your blogs these days seems to be going to the trouble of making a list. A top ten list, a favorites list, lists of lists and so on.

Its called framing.

By ranking others, you infer that you are an authority. You announce it to every blog on the list and then each blog ultimately posts it as shameless self promotion (I am certainly guilty of that every day).

Matrix (see?) was announced as one of the “Top 35 Real Estate Blogs” according to, a real estate investing community site that I was not familiar with.

However their content is impressive and I appreciate their recognition. In fact, I agree with much of their list but they left out, who recently won an award as most innovative real estate blog from Inman at the San Francisco Connect conference.

Finding Matrix

August 30, 2006 | 6:52 am |

What are people thinking about these days when it comes to real estate?

Here’s a list of search terms on Google that triggered someone to come to our site this week presented in order of frequency. Its pretty myopic but still interesting to me since I can see how people end up at Matrix who probably aren’t familiar with it.

real estate acronyms
real estate economy
michael shvo
matrix real estate
real estate jargon
unusual homes
real estate lingo
experian mortgage trigger leads
matrix housing futures
housing bubble
unusual house plans
baghdad real estate
housing bubble blogs
unusual properties
overpriced housing markets
9/11 5 year anniversary
matrix miller samuel
luxury market
housing index matrix
housing cycles
cme housing futures
zoning and building regulations
bubble bust
philadelphia “real estate”


Taking A Break, Back On September 5th

August 30, 2006 | 6:37 am |

As you have noticed, our posting on Soapbox has been pretty light for the past few weeks, as sleeping in and lounging around reading USPAP at the beach has consumed us in the twilight of summer. We’ll be back after Labor Day.


Confusing A Housing Bubble For A Lending Bubble

August 29, 2006 | 10:32 am |

Much of the housing boom can be attributed to the current lending environment. Housing prices are an indicator of where things are going. But its tough to analyze lending since the stats are few and far between.

In other words: the cart before the horse.

I have long vented about the perils of weak underwriting standards and the pressures placed on appraisers by the structure of the lending system, namely collateral valuation (appraisals). A double hat tip to Barry Riholz for articulating this point so clearly in his post Is a Housing Crisis Approaching? [Big Picture] via the very good Roger Nusbaum post in SeekingAlpha.

Barry’s post is based on a seminal piece in Barrons about loosening underwriting standards by Lon Witter [subsc]. Roger adds another related link with great info [RGE Monitor] as well.

the U.S. has is a lending bubble. His evidence is how loose the lending standards have become, and why not? The banks ultimately just flip the loans to the Fannie Mae (Federal National Mortgage Association, on the NYSE: FNM), where foreclosures and defaults become the headache of buyers looking for greater risk and return.

(And if that doesn’t make you squeamish, simply look at the recent accounting scandals at Fannie Mae.)

Traditionally, Mortgages have been low risk lending, as the loan is securitized by the underlying property. When banks were lending less than the value of the property (LTV), to people with good credit, who also were invested in the property (substantial down payments) you had the makings of a very good business: low risk, moderate, predictable returns, minimal defaults.

Lenders have encouraged people to use the appreciation in value of their houses as collateral for an unaffordable loan, an idea similar to the junk bonds being pushed in the late 1980s. The concept was to use the company you were taking over as collateral for the loan you needed to take over the company in the first place. The implosion of that idea caused the 1989 mini-crash.

The problem here is: what happens if the values of homes begin to decline as inventory builds and rates rise? What does the lender do? They had better decide to start caring about values as well as credit in order to make intelligent loans. Underwriting standards have to rise to avert a lending crisis.

WAMU is the posterboy for weak underwriting. They built their growth and aquisition engine around mortgage lending during the housing boom. As mortgage rates increased and the housing market started to cool in the way of lower transaction volume, what department did they cut to save money? You guess it: The appraisal department. Recently they pulled completely out of the valuation process [Soapbox] and have begun to rely on appraisal management companies [Soapbox] exclusively, which are notorious for attracting the worst element in valuation. The appraiser who work for them are usually form-fillers and provide no analytical service. [Disclaimer: My firm worked for WAMU from the first days of their expansion in New York and saw the problems first hand. They recently jettisoned every appraisal firm across the country (we were one) as part of their cost-cutting move.]

Barry’s post analyzes WAMU’s market position in his post.

Right now, many mortgage lenders are still hanging in there, any way they can. I yearn for the day they actually want to understand what their risk is. Unfortunately, only a select few actually get this point.


No Thanks, I’m Just Looking

August 29, 2006 | 7:18 am | |

We’ve all said it.

I may be browsing in a store and a store clerk might come up to me and say May I help you with something? or Is there anything I can help you with today?.

You smile and say:

No Thanks,
I’m Just Looking.

On the web, there are those who participate in a forum, chat room or blog thread and there are those who lurk. Housing has lurkers too, only they are called “lookers.”

As the housing market cools, it doesn’t necessarily mean people have stopped looking at property. They’ve simply been more reluctant to actually buy something. In Dawn Bonker’s Looky-loos ‘fess up [LA Times], she explores the phenomenon. The lookers fall into three categories:

  • Check out prices to see how they compare to their own house
  • Get decorating ideas
  • HGTV/”re-designers” who love to critique properties

Over the past 5 years, with the housing boom at full throttle, there are many who adapted real estate as a hobby, or to some, an obsession. Developers and sellers these days often wish they had better access to the thoughts of these lookers for insights that might help them sell their properties. Since lookers are emotionally detached from the properties, I would think their opinions would be more objective and therefore more constructive.

I think there is a fourth category as well:

  • Buyers

While there are many former buyers who are simply out of the market, many of the lookers today are very interested in being buyers but they can’t make the decision. There is a lot of money on the sidelines right now but with all the worries about the real estate market, they are not ready to decide.

From The Garden State: The Otteau Report: July 2006

August 29, 2006 | 6:35 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


July was another cool month for the housing market as declining buyer-confidence continued to take its toll on home sales. In July, contract-sales activity declined 11% from the June level and was 25% below the year earlier pace in July 2005. That this slowdown comes in the midst of the prime March-to-August selling season when home sales should still be running hot provides compelling evidence of a market transition wherein home buyers have greater control over final selling prices than at any time since 1991, a 15-year span.

From an inventory perspective, the number of homes being offered for sale now stands 67% higher than a year ago. This equates to a 9-month supply as compared to only 4-months last year at this time. It is however encouraging to note that Unsold Inventory increased by only 1.5% in July following a 47% increase over the 1st 6 months of the year, which works out to nearly 8% per month over that period. This moderation, coupled with recent declines in mortgage rates present home buyers with an opportunity window that will likely close once mortgage rates continue their upward climb.

From a price perspective, market conditions continue to exhibit the greatest weakness for luxury priced homes. Unsold Inventory below $600,000 stands at an 8 month supply as compared to 27-months above $2.5 million. This weakness in the luxury market has been developing slowly for several years now and will likely continue for the foreseeable future. As a result, expect the market for more affordably priced homes to be the first to recover.

Here are 2005 annual stats.

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Carnival Of Real Estate [Week of August 28, 2006]

August 29, 2006 | 6:12 am | Public |

[Matrix is hosting the Carnival of Real Estate the week of September 25, 2006. Its a great way to read some great posts on real estate topics of the day and not get sick on cotton candy.]

What is a carnival?

Here’s a great carnival Q & A. Its basically a a bunch of blogs that take turns displaying the favorite posts of the group each week. Carnivals can vary by topics and of course and the most relevant to Matrix readers is the Carnival of Real Estate.

This week’s host: The Landlord Blog throws the darts at the best posts submitted to them by carnival members.

Next week’s host: NuBricks who will squeeze the carnival in between new property development news & off plan launches.

Carnival of Real Estate


(Mis)State(Ment) Of The Housing Market: Following The Arrows

August 28, 2006 | 11:38 am |

In Shawn Tully’s myth buster piece Getting real about the real estate bubble [CNN/Money], he sounds fed up with the housing bulls and after 5 years of biting his lip, he gets to vent with a lot of hyperbole and exageration, but its food for thought.

  • Myth #1: As long as job growth is strong, prices can’t go down
  • Myth #2: The builders learned their lesson in the last downturn. They won’t swamp the market with new houses when the market turns
  • Myth #3: Low interest rates will keep values rising, or at the very least, put a floor under prices
  • Myth #4: restriction on development in the suburbs ensure low supply, and guarantee rising prices

This seems to be real estate spin in reverse. All of the arguments, while generally accurate, seem to take the most extreme arguments and make it the position of all housing bulls. Well, I should say, housing bulls are non-existent these days. None can be found, even David Lereah, the chief economist at NAR has changed his stance. A housing bull today can be defined as someone who doesn’t think there will be a market correction.

None known.

Bears/Bulls – Middle of Road
Richard Beales of Dow Jones Market Watch makes the case in the other direction (well, not all the way) in his article: On Wall Street: Housing data not as gloomy as bears think.

  • The post-bubble outcomes in the UK and Australia and been a relative non-event.
  • The current economic environment, while weakening, is in much better shape than 15 years ago.
  • Fixed rate mortgages still dominate, despite rise in riskier mortgage types.
  • Weakening economic conditions are driving mortgage rates down.

These arguments are basically the points Mr. Tully refutes in the previous list.

Which way?
Which way to lean right now is anybody’s guess right now. On a purely anecdotal level, I have found that the late summer months, with a slow news environment and vacations, that negative interpretation of real estate seems to win out. To the contrary, the spring market tends to be portrayed in overly optomistic tones because things are happening.

Whatever the direction, there are already predictions that the Fed will start lowering rates in 2007 in response to a potential recession [Seeking Alpha], scarcely 6 months after stopping its measured approach, because it overshot the economy, and along with it, housing.

We should learn a lot this week, which promises to deluge us with economic data [MW] before the Labor day weekend.


House Versus Home

August 28, 2006 | 6:47 am |

The terms house and home seem to be used interchangeably in market stats, but I wonder if thats really appropriate.

House: a building in which people live; residence for human beings, a household. Source

Home: a house, apartment, or other shelter that is the usual residence of a person, family, or household. the place in which one’s domestic affections are centered. Source

Both refer to a residence but the phrase home is more personal. There doesn’t seem to be a real correlation on who uses what pharse. Although the NAR uses home most likely for marketing emphasis, so does the Commerce department when tracking new home sales. Yet Commerce uses the term housing starts.

To me, home implies warmth, personal, a residence and house implies a unit of measure, a thing.

Plus a house is bigger, its got one more letter (wink).


[Getting Graphic] Housing Inventory Rocks The Boat

August 28, 2006 | 6:24 am | |

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

Source: NYT

Floyd Norris makes the brilliant but simple comment:

IF you raise prices enough, people will stop buying.

in his article In Housing as in Most Things: What’s Up the Most, Falls the Most [NYT].

I have always pictured the US as the cross section of a boat. When the water gets choppy (such as a housing boom or bust) the east and west coasts move up and down more than the center of the country. Well, this past housing boom has proved to be no exception.

Home sales as a percentage, have generally fallen further on the coasts than they have in the Midwest. In other words, areas that saw the largest jump in housing prices during the boom, are the same areas that are seeing the largest drop in home sale activity. A realization seems to have set in that was lacking before: price levels were pushed beyond affordability before buyers realized it.

This drop in activity is caused inventory levels of existing single family homes to swell. On a national level inventory has generally ranged from 2 to 2.5 million homes. With the drop off in demand, home inventories are nearly at 4 million.