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Archive for October, 2006

Zillow Gets FTC’d Despite Randomness Of Their Inaccuracy

October 31, 2006 | 8:23 am | nytlogo |

Zillow has been the punching bag of many of late, and perhaps its simply backlash from the large amount of free publicity they got after launch. It generated a lot of buzz to the point where bloggers were so sick of talking about them that they swore to abstinence (from Zillow) for a while.

People have had a chance to use the site for a while now and are beginning to realize how inconsistent the results are. Very accurate in some markets, very inaccurate in other markets and a lot of markets in between so you don’t quite know when and where the results are accurate. The results can be like snowflakes: pretty to look at, but the results for each search can provide a random result. They publish the ratings but I am sure the consumer doesn’t refer to them very often. And seriously, 52% accuracy in NYC means the results should not be published, should it? I have commented on this before since I am in the valuation business.

Zillow is such a neat concept on paper, but in the end, all data goes into a black box and spits out a number. They over promised and should have moved slowly over the country as they felt comfortable in each market. The logarithms that create the “Zestimates” are proprietary and perhaps thats what drives the suspicion, combined with pretty significant inaccuracy ratings.

Despite what I think are best efforts on Zillow’s part, however, I suspect we are seeing the first of several attempts to shut them down or change their model, refuting the argument that since they disclose their inaccuracy, they can continue business as usual. Because of their high visibility, its likely to become a public relations coup for anyone that goes after them.

Damon Darlin writes about the complaint filed by the Community Reinvestment Coalition in his article A Home Valuation Web Site Is Accused of Discrimination.

In a letter sent by the National Community Reinvestment Coalition to the Federal Trade Commission last Thursday, the group asserted that Zillow’s Web site misrepresented home values and placed residents in low-income neighborhoods “more at risk for discriminatory and predatory lending practices.”

Here’s the complaint [pdf]

I don’t really follow CRC’s logic for taking this action since all markets are subject to various degrees of inaccuracy but its going to be interesting to see what the FTC does. I have seen this from my own personal experiences from family members in different parts of the country who have used the site.

Complaints are filed against appraisers for inaccuracy too, but unless there is negligience or fraud commited, its simply an opinion. I know first hand that data collecting in my urban market is often very challenging, and more difficult than in many surrounding suburban markets. Besides record keeping issues, one overlooked reason for the inaccuracy of urban areas is the challenge of valuation in a “vertical” market. Condos and co-ops stacked on top of each other is very difficult to automate.

Whats also really interesting, is the fact that they have been marketing to consumers in order to bypass the real estate professional, but recently the orientation has changed to try to be broker-friendly. This attempt to placate the brokerage community backfired recently and the pr spokesman for the NYT article contradicted themselves by saying:

[UPDATE]A Zillow spokeswoman, Amy Bohutinsky, said the site’s valuations, which it calls Zestimates, were intended for consumers and had never been marketed to real estate professionals. The company sees the tool as a way to empower consumers who in the past would have to rely on a real estate agent to make an estimate based on the sales of comparable homes in a neighborhood.

Is Zillow’s market ignorance in certain areas bliss? Thats up to the FTC, apparently.

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Outstanding On Our Soapbox This Week: Predictin’, Rebatin’, Cyclin’

October 31, 2006 | 7:29 am |

This week, our contributors to our other blog Soapbox have been busy. Here are a sampling of several new posts:

Solid Masony column: Is It A Trick Or A Treat – Why Must Everyone Try To Predict The Future?

The Hall Monitor column: Tax Rebates That Really Aren’t

Fee Simplistic column: Short Term Thinking In Long Term Cycles


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[Solid Masonry] Is It A Trick Or A Treat Why Must Everyone Try To Predict The Future?

October 31, 2006 | 7:15 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 believes that all appraisers need to have a macro-economic perspective in order to be effective. This week, he wonders why real estate and for that matter, pundits of all markets feel obligated to predict the future, in his Solid Masonry post. Of course, John is just itching to say: “the entry-level market is going to decline .013% this quarter” just kiddin’ John!…Jonathan Miller


They say a little bit of knowledge is dangerous. If so, then these are pretty dangerous times. Suddenly everyone, including the lady with the alligator purse, is a real estate expert and is charging to the forefront with all kinds of verbiage as to where the market is heading. It’s going up, down, sideways, coming in for a soft landing, heading for a crash, slowing up, slowing down, bottoming out, rebounding, taking a breather, collapsing, presents a buying opportunity, spells of economic disaster, and god knows what else.

Now there is no doubt market reports which present a snap-shot of past trends offer an insight as to where we are, historically speaking. It’s great to see how markets have evolved, developed, shifted and so forth, in concert with changes to the economy, demographics, needs and wants of market participants, etc. I personally have learned a great deal from the statistics, as well as the insights of others. Add to the fact that almost everyone, even those who don’t own real estate, follows the most popular market indicator of all time, the median price of homes, and you have some interesting reading.

While there is nothing wrong with throwing out some short-term predictions to where we “might” be headed in the next 1-2 quarters, some of us have gotten a little full of ourselves by projecting years into the future. In all fairness, sometimes we “experts” are prodded into coming up with something, anything, as so many folks are asking about the future and want answers. And yes, I’m sure I’ve done my share of contributing to the problem, both as the seeker and the seer. It’s kind of funny when you realize most of us have a hard time explaining the past trends, even well after the fact. I personally never would have predicted the New York metropolitan area would see steady price gains from 1994 through 2005 at the rates of appreciation we achieved. And I still can’t fully explain it all, as these trends far out-paced the regional economy.

It’s like the weatherperson giving us an accurate 7-10 day forecast, when their odds of getting the 3-day forecast right is about 50-50. Let’s be real here. Just tell what weather I’m bound to face in the morning when I leave my house, followed by a reasonable guestimate for the remainder of the day, and that’s it. When I get home tomorrow night, I promise, we can do the whole thing over again. This way, we can devote more news program time to the things we love: like news (unless someone is predicting the outcome of the elections), or sports, (assuming their not predicting who’s going to the super-bowl during the opening week of the season), or.

So is it a trick or a treat; why must everyone try to predict the future?

[Editor's Note: Since I write a lot of market studies, here's the answer: because its a basic human instinct for survival. We want to know if the meteor is going to hit the planet or the hurricane is going to hit the coast. I am asked about the direction of the real estate market every single day. Of course I never predict the long term because its not possible and get flack in my Three Cents Worth posts for Curbed for not doing so, but you can provide the tools to let people predict themselves because they want to. It provides a sense of control, of determining your own fate, accurate or not. The problem with real estate is that for years, so many real estate professionals have been predicting an up market (that was relatively easy), that the negativity of some pundits in the media seems like salt in the wounds to those who make their living in real estate. Well, you can't have it both ways.]

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[Fee Simplistic] Short Term Thinking In Long Term Cycles

October 31, 2006 | 12:01 am |

Fee Simplistic is a regular post by Martin Tessler, whom after 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. He has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week. In this post, teaches us to be wary of short term cycles and think big picture. …Jonathan Miller


One of the advantages of having toiled in the real estate valuation world for some 30 years is that you cannot help but develop an institutional memory and particularly a conviction that the market operates in cycles. As a young analyst with an educational background in real estate economics my involvement in a variety of consulting and appraisal assignments on income producing and corporate properties was always rooted in aspects of supply and demand. Grandiose plans by developer clients did not deter our drawing negative conclusions if poor market demand resulted in long absorption periods and economic infeasibility.

My first exposure to the chasm that could develop between real estate markets and client expectations in appraised value (these were the days of pre-FIRREA/USPAP) was in the early 1970′s. At that time the then nascent world of mortgage REIT’s was a period of very aggressive lending that could be characterized as “money chasing deals”. Many of the assignments involving new development did not seem to pan out to the scenarios or expectations of clients in terms of value or anticipated time horizons. Anyway, this was not our concern and one would have to assume that any shortfall in value or other expectations would have to be addressed in the underwriting by the lender. The aggressive REIT lending cycle of the early 1970′s was exacerbated and came to an end as a result of the first Arab Oil Embargo/Energy Crisis in 1974. This led to vast double digit inflation and interest rates and the term “disintermediation” -the word coined by PhD economists to explain the vast withdrawal of deposits from passbook savings accounts that were paying single digit interest. Financing for new construction all but disappeared in light of these cyclical conditions.

Fast forwarding to the late 1980′s saw a different phenomenon develop: aggressive lending by S&L’s and fraudulent valuations by unscrupulous appraisers leading to massive loan writedowns and foreclosures. To save our banking system the FED under Mr. Greenspan drastically lowered interest rates and Washington created the RTC (Resolution Trust Corp) to package the bad loans. Not the least of these reforms was the passage of FIRREA in 1989 and the adoption of USPAP. While this did not deter the miscreants entirely it did cut down on aberrational mortgage lending supported by such fraudulence.

Today, one cannot pick up a newspaper or turn on the TV without hearing how our housing market is crashing and bringing the economy down. Lost in this reportorial rhetoric is the fact that the housing market is not one mega-market but many individual local markets with varied demand based on employment prospects. Markets that have not caved are likely to be those where employment has grown or at least not declined. Using New York State data, housing prices have appreciated 73% over the past 5 years with median price rising 11% between 2004-5. Can this hot trend continue? Perhaps in the Manhattan market where booming Wall Street activity portends huge year-end bonuses and likely to drive demand. Will this spill over to the rest of the State not likely if one takes into account that Buffalo, Syracuse, Rochester and Albany are also in New York. Any market declines are likely to be localized and cyclical rather than nationwide. Applying a long term perspective to the market can bring into focus that we have been mesmerized by a short term cycle over the past 4 years and cyclicality and real estate are not mutually exclusive.

For those who believe that markets must always be on the upswing to higher values or prices it reminds me of the joking we used to do in the earlier days when Discounted Cash Flow (DCF) analysis first came into practice. We called it the 4th Approach to Value: “you tell me the value you want and I’ll tell you the assumptions you have to use to get there”.

Semper Fee Simplistc

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[The Hall Monitor] Tax Rebates That Really Aren’t

October 31, 2006 | 12:01 am |

Todd Huttunen began appraising more than 20 years ago with a few years off in between to pursue a career in cabinet making. He relegated that to hobby status and is currently an appraiser in an assessor’s office. His best friend dubbed him The Hall Monitor because of his rigidity and respect for rules. He offers Soapbox readers tongue-in-groove insight on appraisal issues. Today Todd breaks down the logic behind a tax rebate program to up the ante for his PBS membership. …Jonathan Miller


The note reads as follows:

Dear Fellow New Yorker:

In accordance with the new STAR school property tax rebate program approved by Governor George Pataki and the State Legislature, we are pleased to provide you with the attached check to help reduce the burden of your 2006-07 school taxes. This money is in addition to your existing STAR benefit.

Sincerely,
Andrew S. Eristoff
Commissioner, Taxation and Finance

The check is in the amount of $330.61 and it has my name written on it. Like everyone else, I prefer checks like this because I get to sign the back instead of the front.

My problem is I don’t know who to thank for this “tax rebate”. In my case, it’s not a rebate at all. It’s a gift of some kind but I don’t really know who gave it to me.

You see, I live in a co-op (in a studio apartment) whose market value is about $100,000. I don’t get a tax bill for my individual unit. The bill for the whole building is paid by the management agent and my fair share of that bill is included in my monthly maintenance. My share of the school tax this year, without STAR, would have been around $1,300.

But here’s the thing The Basic STAR exemption is worth roughly $1,600 this year in the Eastchester school district. Naturally, the only people who get the full $1,600 taken off their school tax bills are those whose bills exceed $1,600 in the first place, which is only fair. So, I really can’t complain about my school taxes because (thanks to STAR) I don’t pay any school taxes!

That fact notwithstanding, Governor Pataki, the State Legislature and the Commissioner of Taxation and Finance sent me a check for $330.61 to “help reduce the burden of (my) 2006-07 school taxes” but they can’t reduce my burden because I have no burden (other than the one I feel about having this check I don’t deserve).

I suppose I could send it back or tear it up but that wouldn’t ease my burden, it would just make me feel stupid. Then again, I could use it to pay down some of my own debt. But if paying down debt was a good idea I’m sure the State of New York would have used that money to pay down some of its own, rather than send rebates to 3,000,000 people right before Election Day. I think I’ll just use it to renew my WNYC and PBS memberships, and for that kind of money I’d better get a tote bag AND a coffee mug.


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Good Grief: 5 Stages of Housing Grief

October 30, 2006 | 8:25 am | nytlogo |

From Paul Krugman’s Op-ed piece Bursting Bubble Blues [NYT subsc]:

* (1) Housing bubble? What housing bubble? “A national severe price distortion [in housing] seems most unlikely in the United States.” (Alan Greenspan, October 2004)

  • (2) “There’s a little froth in this market,” but “we don’t perceive that there is a national bubble.” (Alan Greenspan, May 2005)

  • (3) Housing is slumping, but “despite what you hear from some of the Eeyores in the analytical community, a recession is not visible on the horizon.” (Richard Fisher, president of the Federal Reserve Bank of Dallas, August 2006)

  • (4) Well, that was a lousy quarter, but “I feel good about the U.S. economy, I really do.” (Henry Paulson, the Treasury secretary, last Friday)

  • (5) Insert expletive here.

Krugman makes the argument that the drop in GDP and construction spending as well as the rise in foreclosure rates foretell a long decline in housing (I seem to recall a recurring pessimistic theme in his past columns on housing). From a political perspective, the Bush administration has tried to turn coverage from the Iraq War to the economy but that doesn’t appear to be a wise strategy.

In case you’re wondering, I don’t blame the Bush administration for the latest bad economic numbers. If anyone is to blame for the current situation, it’s Mr. Greenspan, who pooh-poohed warnings about an emerging bubble and did nothing to crack down on irresponsible lending.

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Restricted Supply Means Faster Return

October 30, 2006 | 7:58 am |

What goes down, must come up…I think it goes something like that? Peter Coy’s Boom! Bust! Boom? Check the history of housing busts. Some areas bounce back more strongly than others [BW]. The article deals with the concept of how quickly a market can return from a downturn.

How common is this boom-bust-boom pattern? Over the past three decades about 40% of housing busts in big metro areas have eventually been followed by strong recoveries. That’s according to a BusinessWeek analysis of inflation-adjusted housing prices. In an additional 15% of markets, prices adjusted for inflation barely got back to their previous peaks after 15 years. In the remaining 45% or so of markets, prices adjusted for inflation were still down a decade and a half after their pre-bust peaks.

According to Edward L. Glaeser, a Harvard University economist, whose work I admire especially his paper: Why is Manhattan So Expensive? Regulation and the Rise in House Prices [pdf] bases his thinking on restricted supply.

Markets with more zoning restrictions, less available land an other supply restrictions, may see more volatility in pricing, but are more likely to bounce back more quickly. In other words, although these markets may be more expensive to begin with but they generally have less speculation and more restrictive land use controls. As a result, they tend to bounce back sooner.

This article presents yet another argument as to why the US housing market cannot be looked at as one broad market despite the oversupply and high demand for articles that do just that.



[The Hall Monitor] CAPS LOCK AND BOILERPLATE APPRAISAL, INC.

October 30, 2006 | 6:35 am |

Todd Huttunen began appraising more than 20 years ago with a few years off in between to pursue a career in cabinet making. He relegated that to hobby status and is currently an appraiser in an assessor’s office. His best friend dubbed him The Hall Monitor because of his rigidity and respect for rules. He offers Soapbox readers tongue-in-groove insight on appraisal issues. Today Todd suggests we all rip the Caps Lock key from our keyboard. …Jonathan Miller


I’M BEGINNING TO WISH SOMEONE WOULD JUST GO AHEAD AND NAME THEIR COMPANY CAPS LOCK AND BOILERPLATE APPRAISAL, INC.

CLIENTS CAN’T HELP BUT BE IMPRESSED WHEN THEY OPEN AN APPRAISAL THAT LOOKS LIKE THIS. NOTHING SAYS QUALITY, THOROUGHNESS, AND ATTENTION TO DETAIL QUITE LIKE A REPORT WRITTEN IN ALL CAPITAL LETTERS.

WHEN THE BODY OF THAT REPORT INCLUDES BOILERPLATE COMMENTS THAT DON’T APPLY TO THE PROPERTY BEING APPRAISED, SO MUCH THE BETTER. AND IF YOU REALLY WANT TO SHOW EM WHAT YOU’RE MADE OF, MAKE SURE YOU HAVE SOME TYPOS IN THE BOILERPLATE.

Now I realize that appraisers need to use all the tools available to them in order to work efficiently enough to make a living. The programs out there today are truly fantastic and light years ahead of the literal “cut and paste” drafts I wrote by hand before giving them to a secretary to type when I started appraising in 1985. Does anybody remember Forms and Worms?

In a way, the technology available today makes the caps lock and boilerplate sloppiness even more unforgivable since you really only have to do it slowly one time. One carefully crafted phrase per section (maybe three for market conditions property values are up, down, stable) followed by spell check and that should hold you for years.

There certainly are appraisers out there who are doing quality work and know how to use the shift key. But of the appraisals that come into my office, about three out of four are SCREAMING. And no matter what words they write, this is what I read: I NEVER LEARNED HOW TO TYPE AND THIS IS FASTER. NO ONE REALLY READS THIS STUFF ANYWAY (unfortunately, that is frequently true).

If your reports look like a tabloid newspaper headline, do yourself and your clients a favor. Leave the caps lock for those occasions where it’s appropriate, like DEWEY DEFEATS TRUMAN (come to think of it, maybe that’s not the best example either and without question some of you are wondering, Who’s Dewey and what did he win? ).

By the way, for those of you who may have been wondering why I’m called the Hall Monitor, I trust this post has answered that question.

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[List-o-links] From The Tank: Tools, Lessons And Messages

October 27, 2006 | 12:05 am | curbed |

Periodically I purge some links I collect that are worthy of a post or were interesting or fun, but I didn’t have enough time to expound upon and too much time had passed by. Since I didn’t want them to let them be forgotten, I pulled them out of the tank – definitely worth checking out.

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Top 10 Clipboard: Cities To Love, Hate, Invest, Avoid

October 27, 2006 | 12:01 am | realtytraclogo |

CNN/Money’s Business 2.0 has several top 10 city ranking features that are kind of fun to read about. I can’t figure out why we would be curious about a top ten list. After reading a feature like the top ten places to live, do we pack up and move there? Do we call our parents and thank them or give them a hard time for making it our home? Or is it more reassurance that we are living in the right place or simply affirmation that we made a terrible error?

Top 10 cities: Where to buy now
The real estate slump could get worse before it gets better. But these 10 markets offer great opportunities for those who have the patience to buy and hold.

  1. Panama City, FL
  2. Vero Beach, FL
  3. Bridgeport, CT
  4. Lakeland, FL
  5. McAllen, TX
  6. San Luis Obispo, CA
  7. Wilmington, NC
  8. Manchester, NH
  9. Fort Collins, CO
  10. Atlanta, GA

Comment: I don’t see how Florida would have 3 of the top 4 cities to invest in with all the indicators of overheating.

Where not to buy
_These 10 overvalued cities have run their course, and home prices are expected to drop over the next year._

  1. Stockton, CA
  2. Merced, CA
  3. Reno/Sparks, NV
  4. Fresno, CA
  5. Vallejo/Fairfield, CA
  6. Las Vegas, NV
  7. Bakersfield, CA
  8. Sacramento, CA
  9. Washington, DC
  10. Tucson, AZ

Comment: Six locations in California made the grade and the rest have reputations for high investor concentrations.

Bubble-proof markets
_Short-term price drops are possible. But healthy economies and rising incomes will support these “superstar cities” over the long run._

  1. Boston
  2. San Francisco
  3. New York
  4. Los Angeles
  5. Seattle

Comment: With the inventory overhang in Boston and LA, I am not sure why they make the grade. The rest seem reasonable choices relative to the remainder of the country. San Fran, New York and Seattle are characterized by low speculation and solid economies. Missing 6-10.

Top 10 foreclosure markets
_Where the action is – highest portion of households in foreclosure, from RealtyTrac._

  1. Greeley, CO
  2. Detroit, MI
  3. Miami, FL
  4. Indianapolis, IN
  5. Ft Lauderdale, FL
  6. Denver, CO
  7. Dayton, OH
  8. Dallas, TX
  9. Fort Worth, TX
  10. Atlanta, GA

Comment: With the exception of Florida and Georgia, all locations are not located near the coasts. The Midwest is seeing the auto industry struggle which is affecting employment. These Florida markets have heavy investor concentrations.