Matrix Blog

Archive for February, 2007

[Getting Graphic] Speeches, Stocks And Safety

February 28, 2007 | 9:44 am | nytlogo |

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

Click here for full sized graphic.

Greenspan gives a speech in Hong Kong [NYT] and mentions the r-word (recession) as being a possibility in the US and the following day, after just reaching a record, the Shanghai Composite Index corrected sharply (but its up today) [WSJ].

Notice how Greenspan still carries more weight than Bernanke in terms of an immediate market reaction after a speech?

Combine this phenomenon with the coincidence that Freddie Mac announces more restrictive parameters for subprime lending (sorry, 3rd consecutive day of talking about subprime), durable goods orders shows weakness and all of a sudden, the Dow Jones Industrial Average is falling 400 points, aided by a glitch in computerized trading.

Thats quite a sequence of events for anyone to process. However for perspective, thats a 3.29% drop in the DJIA index, only 4.4% from its record high and yet it still remains above 12,000. I don’t want to sugar coat the drop because it is still a large drop, but on Black Monday, September 19, 1987, the index dropped even more. It fell 508 points but it fell from 2,500 and nearly 23% of value was erased in a single day. Quite a different senario than 3.29%. I remember being in Kansas City visiting friends on that day in 1987 thinking I was out of business. Real estate was over. (Of course I had that same feeling on September 11, 2001).

Warning – statistical aside: Every day, the rise and fall in the DJIA is chronicled in thousands of nightly newscasts. The other day the quote went something like this (I am embelishing here just a little bit):

Stocks slid 5 points as investors grew skittish about the price of rice in China and the growing political clout of left handed orthodontists…

Thats 5 points of a total index of about 12,600 points at that time or a .0004% drop. This is more akin to a rounding error and not an indicator of anything, anymore than an increase of 5 points would be. I think the consumer sees these points as percentage and reads more into subtle changes than they should simply because no perspective is provided. Its like looking at existing home sale trends as a benchmark for a local real estate market. The DJIA is merely a list of major companies that may or may not reflect the overall stock market (sound familiar?).

ok, I am back from the aside.

I was listening to a group of real estate panelists at a luncheon yesterday as the stock market was falling. At the end of the panel, a question came from an audience member that went something like this:

Now that the stock market has fallen moret han 400 points today, what will be the impact on New York City real estate?

The answer given was essentially no affect but the question seems a little dramatic at this point. My mindset is usually oriented to the trend is your friend.

However, it does raise the point that perhaps the conventional wisdom of a continued improvement in the US economy is more tenuous than has been cheered for as of late. In the fall, I was drifting toward the belief that the economy was headed for a recession. My worries have lifted somewhat but I don’t carry the same optomism that the stock markets seem too.

Housing should ultimately provide more of a drag on the economy. I don’t think the impact of the slowdown has had adequate time to fully flow throw the economy. Honestly, its been a challenge to me personally to keep euphoria in check, when commenting on national trends given the better real estate conditions enjoyed in New York as compared to other parts of the country.

What does this stock market drop mean for the real estate economy?

I am not entirely sure. However, if the underlying economy doesn’t change significantly and more people become more risk averse, we may see more movement to saftey like we did yesterday as people move from stocks to treasuries. Treasury prices would go up, and as a result, yields would go down. As yields go, so do mortgage rates, helping temper growing damage caused by foreclosures and limiting the future effects of tightening underwriting guidelines.

All this from a Greenspan speech in Hong Kong. Just imagine if the speech was given at halftime during the Superbowl?


Tags: , , , ,


[Periscope] Moving From Housing To Lending Via Subprime

February 27, 2007 | 12:13 pm | wsjlogo |

As I lamented in yesterday’s post Banking On Profits, Not Risks, the lending industry and investors have had short attention spans when it comes to understanding risk. As the housing market continues to either cool or stabilize, depending on what local market is being discussed, a new focal point is arising…lending.

With the housing bubble as a media topic nearly worn out, or even with a few kicks left in it, subprime has taken the torch as one of the next hot (er…sorry) topic. Today alone, the Wall Street Journal had seven stories on subprime lending. And here is an endless supply of other sources on the topic as well.

Institutions looked at subprime as a growth sector in an otherwise highly competitive mortgage landscape. Large fees, higher margins were some of the attractions of the lenders like HSBC, Novastar, New Century Financial and Citigroup. Now its all about damage control.

In today’s Heard on the Street column Subprime Game’s Reckoning Day [WSJ]:

If these so-called subprime borrowers continue to have problems paying their debts, the lenders that target them likely will have to boost how much money they set aside for bad loans, cutting into their bottom lines. That could mean even lower stock prices.

There also is a concern that if the real-estate market remains cool, some borrowers with better credit histories might also begin struggling to make payments on certain popular, but unorthodox, mortgages. These types of loans allow borrowers to skip monthly payments, carry low short-term teaser rates or don’t require detailed financial documentation. If that happens, companies such as BankUnited Financial Corp. and Countrywide Financial Corp. could suffer.

And today, Freddie Mac announced that it will toughen subprime lending standards [Reuters]. Here’s Freddie’s press release. Ever notice how these things are announced AFTER its a problem? After all this is a quasi-government corporation that sets standards for secondary market investors. Seems like there was a lack of foresight on this issue.

Here’s a great primer on the topic by Jouhn Makin called Risk and Return in Subprime Mortgages [AIE].


Tags: ,


Banking On Profits, Not Risks

February 26, 2007 | 12:01 am | realtytraclogo |

Weakness in the national housing market hasn’t really hit the banking sector results yet, or so it would appear to be the case. Here are a few thoughts:

Banking Profits/Credit Quality
On Friday the Federal Deposit Insurance Corp (FDIC) announced that banks and thrifts reported record earnings in 2006, the sixth yearly increase in a row. The FDIC is an independent agency of the federal government created to maintain public confidence in the banking system.

However, credit quality of mortgage loans has fallen as evidenced by the increase in mortgages that are more than 90 days delinquent and the increase in charge-offs.

Residential mortgage loans that were noncurrent (90 days or more past due or in nonaccrual status) increased by $3.1 billion (15.6 percent) during the fourth quarter. This increase followed a $974 million (5.2 percent) increase in the third quarter. Net charge-offs of residential mortgage loans totaled $888 million in the fourth quarter, a three-year high.

Exotic Mortgages
Even negative amortization adjustable rate mortgage (NegAm ARM) delinquencies, the universally loathed and blamed mortgage product of all that is bad with mortgage lending these days (excluding subprime) has remained relatively low so far. The risk of their delinquencies may rise as housing prices fall, especially since these products were more popular in markets that saw the largest levels of appreciation. Its a little premature to attribute the lack of significant problems with these types of loan products as a sign that they really weren’t a big problem to begin with.

Foreclosures
According to RealtyTrac, foreclosures are clearly on the rise. January 2007 versus 2006 saw an increase of 25%. A scary number but percentages can be a little misleading since the hard numbers are not presented as a percentage of the total mortgages outstanding. According to the Mortgage Bankers Association, the December 2006 total delinquency rate was 4.67%, which is not high by historical standards. The largest portion came from subprime loans. However, delinquency is a broader definition than foreclosure, but for argument’s sake, its getting worse.


Click here for full sized graphic.

Risk Assessment
One of the problems with mortgage underwriting during the housing boom was the lack of understanding of risk. Automation and detachment from the collateral itself allowed lending institutions to marginalize the risk, perhaps by pushing it off onto theoretically unaware secondary market investors.

One of my favorite, go-go 1980′s books was Liars’ Poker by Michael Lewis (along with Barbarians at the Gate: The Fall of RJR Nabisco and Den of Thieves).

One of the stars of Liar’s Poker was Lewis Ranieri who helped invent the mortgage backed securities concept – selling bonds tied to mortgages was part of an excellent James Hagerty piece in the WSJ on Saturday called Mortgage-Bond Pioneer Dislikes What He Sees [WSJ].

Ranieri and his colleagues in the late 1980′s (thoughts of my Liar’s Poker readings included them bragging about having more powerboats than polyester suits and how they ate onion cheeseburgers for breakfast) combined

regular mortgages into giant pools of loans that could be divided up and resold as bonds to pension funds and other institutional investors. These bonds come with a variety of credit ratings and are repackaged in endless permutations to meet investors’ varying appetites for risk.

Ranieri’s current assessment of the problem is that today’s investors don’t understand the risk because the expansion of offerings has changed dramatically in recent years and they don’t have the historical perspective.

The problem, he says, is that in the past few years the business has changed so much that if the U.S. housing market takes another lurch downward, no one will know where all the bodies are buried. “I don’t know how to understand the ripple effects through the system today,”

One of the reasons, has been the meteoric rise in collateralized debt obligations, or CDO’s which are sort of like mutual funds for mortgage securities investors who want to spread their risk. The problem is that he says that buyers of the debt don’t understand the risk like secondary market investors do because they don’t have access to the same level of information.

Take away:
Its ok to work hard for profits, and banks have every right to do that. In fact its their responsibility. However, its also their responsibility to understand the risks that are out there. Mortgage lending played a significant role in the housing boom. I am not confident that the banking industry can remain impervious to the by-product of the aggressive lending we’ve seen in recent years, characterized by the don’t ask, don’t tell mentality. I am surprised that more attention hasn’t been placed on the risks in the mortgage collateral pool (note: faulty valuation of assets).

There hasn’t been enough time for the housing slow down to affect banking’s bottom line yet. We are starting to see signs of weakness in terms of rising foreclosures and noncurrent loans. However, I wonder if there is greater long term risk associated with the lack of understanding of the risks themselves, or simply greater demand for a good polyster suit with cheeseburger grease stains.


Tags: , ,


[Time] Housing Story Redux

February 26, 2007 | 12:01 am |

The February 22, 2007 issue of Time has a sort of, well, lame, article about the use of the word “housing bubble” in online searches and there is a graph charting how the use of the term is waning. Honestly, this is the sort of analysis done in the blogoshere about 18 months ago (self included) that is really not worthy of a national news publication, no offense intended to Time Magazine.

June 13, 2005
As the story goes, if a new trend is on the cover of Time Magazine, its already happened (or something along those lines). In the June 13, 2005 issue, Home $weet Home: why we are going gaga over real estate was released, yet the housing boom was ending right about then.

I was curious what it was like to read about a housing boom in a national publication during a prior cycle and I looked back in the Time archive online.

September 17, 1977
I was a senior in high school when this issue came out, not thinking even remotely about the housing market. The issue was called (close your eyes and think back 2 years ago): Sky-high Housing: Building Up, Prices Up

The Time article Housing: It’s Outasight sounded a lot like recent coverage but with a few less zeroes. Especially loved the up to their eaves in debt humor.

But the boom is accompanied by a virulent inflation that is upsetting the American way of housing and pricing many people out of the market. Those who are still in it find that they have to pay more money than they had ever thought they would, and then go up to their eaves in debt. In some pleasant but by no means luxurious residential areas of the Northeast, Midwest and West, even $50,000 to $60,000 houses are almost nonexistent, while dwellings of $75,000 to $85,000—and up—are standard. The prices for new houses in June averaged $62,100 around Chicago, $67,700 in the Washington, D.C., area, and $72,100 around Los Angeles.

Also, there was the same wrestling with the old formulas for affordability:

Using the rule that a family’s gross income should be at least five times its mortgage payments (the one that has held up best over the years), FORTUNE calculates that in 1950 seven out of ten American families could afford the median-priced* new house; in 1975, after a quarter of a century of rising incomes, only four out of ten could do so. Going by a different formula that in practice parallels another standard rule—the purchase price of a house should be no more than double the buyer’s annual income—the M.I.T.-Harvard Joint Center for Urban Studies estimates that last year fewer than three out of ten American families could afford a median-priced new house, and one in three a median-priced used house. That measures the cost of moving; many families are living in houses that they statistically could not “afford” if they had to purchase the same homes today.

Friday, Oct. 31, 1969
I went back a little further. I could have been standing in line for milk in my 4th grade elementary school cafeteria when this issue hit the news stands.

One of the articles (not the cover story) WHY HOUSING COSTS ARE GOING THROUGH THE ROOF told the story of the nation’s housing. In three years, the average sales price of a house had risen by $5,800 or 28.9%.

Finding a place to live today is a trauma for millions of Americans. During the past two years, the price of houses has risen almost twice as fast as the over all cost of living. The average new house in the U.S. now sells for about $26,000; the same one would have cost $20,200 in 1966. In many suburbs, prices have jumped a good deal faster than that. At the same time, the overwhelming demand for apartments has pushed up rents, and vacancy rates have fallen to the lowest level in twelve years.

The more things change, the more they stay the same.


[The Hall Monitor] Appraisers As Advocates (AAA)

February 26, 2007 | 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. In this post, Todd wonders why dilligent, honest and hard working appraisers don’t get the most of the tax assessment assignments and perhaps comes up with a name for a new appraisal society. …Jonathan Miller


All appraisers Most appraisers Many appraisers Some appraisers

All right, a tiny minority of appraisers are nothing more than whorish advocates for their clients. But due to some kind of statistical anomaly, a disproportionate number of the appraisals I review, for assessment grievance purposes, come from this tiny minority and it gets a little frustrating after a while. Why is it that the vast majority of appraisers – who are diligent, honest and hard-working – get so few assignments in my town?

One recent example of appraisal garbage was prepared on behalf of the owner of a newly constructed single family house which we assessed at its full value in 2006. The owner filed a grievance, as was his right, and hired an appraiser who happens to be an MAI. His appraisal included six comparable sales, but what bothered me the most was the sale, of the house next door, which was not included in his appraisal.

Back when I started work as an appraiser in 1985 I had the good fortune to work for a small, family owned company with an unusually tight-knit group of appraisers and staff. And even though we came from different religious backgrounds, we shared a common belief in one God, to whom we lovingly referred as the God of the comp next door. Every assignment whose subject is blessed by the God of the comp next door is easier than it would otherwise be, and my faith is as strong today as it ever was.

Unfortunately, the MAI was not a believer and explained his position thusly – “THE APPRAISER NOTED A LACK OF CLOSED COMPARABLE SALES WITHIN THE SUBJECT’S MORE IMMEDIATE AREA” Regular readers of The Hall Monitor already know how I feel about appraisers whose reports are written in ALL CAPITAL LETTERS. Leaving that aside, in this case the subject was a new house and the renovated house next door had sold seven months earlier. But this sale was not used in his appraisal. Interestingly enough, his appraised value for the subject (new house) was 35% below the sale price of the “effectively new” house next door, which had the same number of bedrooms and bathrooms, but was a few hundred square feet larger, better quality construction, and had superior curb appeal (my appraisal had adjustments for these differences but they didn’t amount to 35% of its selling price).

The appraiser also claimed that the “subject suffers external obsolescence because it backs up to a busy street”. Guess what folks – the house next door, which he didn’t use, backs up to the same busy street. The inclusion of the sale of that house on the grid would have illustrated that the “busy street” adjustment was bogus. I’m sure that’s one reason he didn’t use the sale.

This same appraiser considered the functional utility of the (new) subject, with its open kitchen/dining room layout, to be inferior to those of his comparable sales, two of which were 55 year old houses whose formal dining rooms are separated from the kitchens by an actual wall. I was taught that “new” houses, built to current market standards, usually represent the highest and best use while “old” houses which have not been renovated are the ones suffering from physical and/or functional obsolescence. The subject’s open, less formal floor plan reflects the design standards of today. One would think that if a functional utility adjustment is appropriate in comparing an old house with a new house, the old house should be adjusted upward, rather than downward. That’s what I believe, but then I’m not an MAI.

I don’t personally know the appraiser who represented the homeowner in this case. And although I have no way of knowing for sure, I do not believe that his honest opinion of value was the same as what he indicated at the bottom of page two. I don’t think he thought the house was over-assessed. He didn’t use the best comparables and his adjustments were inappropriate. His appraisal was, in my opinion, a deliberate attempt to mislead. I think he gave the client what the client wanted.

The fact that users of appraisals attempt to influence the work of appraisers is nothing new. There’ve been a number of stories in the media lately expressing concern about loans, particularly in the sub-prime market, that have been made as a result of pressure exerted on appraisers to make the number.

Perhaps the answer to the problem of appraisal pressure (whether upward or downward) is to have two appraisals done for every property. Tell one appraiser it’s for the mortgage and tell the other one it’s for the assessment. That way, you can average the two values reached by the two advocates and you’ll end up with something close to market value.


Tags: , ,


[Curbed] Three Cents Worth: Inventory Peaks and Troughs

February 23, 2007 | 10:22 pm | curbed | Public |

Its Friday, so its a little late to provide my Three Cents Worth as a post for Curbed (actually I did it yesterday). I got a permission slip to be tardy this week since I am on vacation This week I get up and down about Manhattan inventory.

To view post: Three Cents Worth: Inventory Peaks and Troughs

Previous posts can be found here.



[Getting Graphic] Act Locally, Think Globally, Get More Confused

February 22, 2007 | 12:01 pm | wsjlogo |

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

In the December 2006 issue of Finance & Development, the quarterly publication of the International Housing Fund, there is an exellent series of graphs that illustrated the The Slowdown in Global Housing Markets.

Source: International Monetary Fund

I have always been interested in the notion that housing markets in industrial nations (on a macro level) seem to move in sync yet we (me) always downplays the meaning of national housing statistics in the US. On the other hand (thinking out loud), national housing stats are often used incorrectly to define a local market, which is not what we are referring to with the market stats of other industrial countries.

I would chalk up the consistency between countries as being influenced by low global interest rates (except Japan [WSJ]). Housing is a lagging economic indicator and followed the influence of low interest rates.

Also, actual price levels achieved in the nations tracked in the studies exceeded fundamental factors used to predict them. This suggests that fundamentals as a measurement tool are incomplete, or that a global housing bubble is indicated. I’d probably go with the former since fundamentals are a topic I touched on last week.





Previous housing market cycles in the United States have been associated with vastly different economic outcomes. In the 1979 cycle, real house prices fell, and consumption, residential investment, and GDP growth all slumped. Of course, economic conditions then were very different from those today: real interest rates were very high, as was the unemployment rate. The 1987 housing cycle was associated with a limited growth impact, and the IMF forecasts that the current housing cycle will do the same for 2007 growth. But there are downside risks. First, the slowing in house price appreciation could be more pronounced than expected—a drop in prices cannot be ruled out. Second, the wealth effects of slower house price growth on consumption may now be larger than in the past because of the greater exposure of households to asset price movements.


Tags:


Northern Virginia Is For Lovers (And Real Estate?): January 2007

February 21, 2007 | 9:26 am |

[This market recap on the Northern Virginia from MLS data is compiled by Butch Hicks, a former president of RAC (Relocation Appraisers and Consultants) (that I am a member of), a friend and an experienced appraiser in Northern Virginia. The results of his efforts are published on his web site as a series of charts, each with a brief summary. (As a kid growing up in the Washington DC area, I was bombarded by "Virginia is for Lovers" tourism ads, and of course "DC is for US, by George")] -Jonathan Miller


View the charts [BHicks.com]

Here’s a sample of the charts available online.




  • The median price paid at the end of January, 2007, 2006 was $433,153, a decrease of 1.6% from the same time period 12 months earlier.
  • At the end of January, 2007, inventory was 5.02 months, an increase of 175% from one year earlier.


Tags:


Windy City Update: Chicagoland MarketPulse January 2007

February 21, 2007 | 9:17 am |

[This monthly market report is provided by Chip Wagner and Robert Headrick of the Headrick-Wagner Appraisal Group in their monthly eNewsletter. I have had the pleasure of knowing them for a large part of my appraisal career. They are both very active in appraisal industry matters having held many leadership positions. Their firm has been covering the Chicagoland market since 1970 and as a result, they both have a wealth of insight. Their focus is on relocation, litigation and lending appraisals as well as slayers of appraisal myths. Chip and Bob author a series of market reports on the Chicagoland real estate market They tell me they are also working on a big revamp of their web site as well.] …Jonathan Miller

This month, after licking their wounds from a Chicago Bears (“Da Bears”) Super Bowl loss to the Indianapolis Colts, they did what any good appraiser would do, analyze the situation and correlate it to the real estate market. They did this in a recent post in Chip Wagner’s new Soapbox column “Chip Shots” called Superbowl Mythbusters: Confirmed, Plausible Or Busted?

Here are the hard stats for the month in the following reports. I’ll link them directly to their new web site when its finished:

Headrick-Wagner Chicagoland February Report [pdf]
January Condo MarketPulse [pdf]
December Detached Housing MarketPulse [pdf]


Tags:


Page One And Not Dead Or Indicted

February 20, 2007 | 4:44 pm | nytlogo | Public |

Well, I’ve been at this for a while now and its always fun and special to be in a Page One story in the New York Times …my 3rd time in a Page One of the New York Times but who’s countin’? ;-)

Yesterday, on my first vacation day in a very long time (actually, I’d call it a vacation from vacations), Tracie Rozhon’s article: Housing Market Heats Up Again in New York City took me away from my vacation (pleasantly I might add) and for icing on the cake, the item was the most popular emailed article of the day (I think reporters see this as independent validation of the reader interest in the piece – I know I do.)

The story was interesting to me, not so much because I was quoted in it (ok, so that was important too) but rather how it came to be.

After last fall’s national election, I noticed a distinct bump up in pricing and the level of sales activity in the Manhattan real estate market while at the same time, inventory was falling. This improvement became more pronounced as record bonus payouts were being announced. At the same time, national housing stats were tanking and most real estate discussion in the media was pretty much gloom and doom.

However, sales activity was picking up locally, inventory was falling, mortgage rates were stable and rental prices were spiking. The rent versus buy decision became less obvious and buyers were wrestling with the same decision they had the year before.

The reporter contacted me about the story early in January and thought it was a big story, perhaps an A1 because it was contrarian to conventional wisdom.

My findings were consistent with her research based on the feedback she was getting. Not perfect or ideal, but improved. I wouldn’t want to suggest that the current price growth and increased activity was going to contine at the same pace either because inventory levels remain too high.

Of course there are always individuals in real estate that can be counted on for a positive spin, since they are in the business of selling. And the risk in that is when no spin is necessary, its still sounds like spin.

But its not about individuals, its about the market.

On another serious note, I hear Donald Trump is placing his hair on the line for Wrestlemania.