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Archive for March, 2007

Subprime Locations: No One Is Safe

March 30, 2007 | 6:57 am | |

Ok, I am exagerating just a little here, but I couldn’t resist. I get the impression that the subprime market is some huge tsunami and I happened to walk really (emphasis on really) far out from shore. So I thought I would try to get my arms (no, not mortgages) around the visual.

The Wall Street Journal went all out and created a series of terrific interactive graphics of the subprime situation.

Map 1 shows the concentration of subprime mortgages as a percentage of all mortgages. What’s the deal with Sharon, Pennsylvania? The concentration of loans in the west coast is amazing. McAllen, TX, Memphis, Richmond and Miami are no surprise, though. These are regions that boomed economically. Chicago and New York too, but why not Boston and DC? Interesting.

Map 2 shows the delinquency of subprime mortgages. New Orleans is expected as well as Detroit. Althought the Midwest did not see the same degree of appreciation and housing activity that the coastal US did, their weaker economic condition is apparent in this chart, as well as nothern Alabama, Georgia and the Carolinas.

Map 3 shows the percentage increase in delinquencies and we see the situation is rapidly deteriorating in California, Detroit and the Boston region.

I am also struck by the growth of subprime in an already low mortgate rate environment. Rates drop, subprimes increase, meaning it wasn’t just about affordability.

David Berson of Fannie Mae does a great job in laying out the hard numbers of subprime laying out the hard numbers of subprime [after April 1, go here for the March 26th analysis] and I found it pretty compelling.

Subprime boomed as a percentage of single family originations during the period the Fed was agressively cutting interest rates or keeping them low (2001 to 2004). Why? Since mortgage rates dropped, affordability improved significantly. Then why such rapid gains in popularity?

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Required Reading: Primer on Subprime – Its About Credit Tightening And Fed Cuts

March 29, 2007 | 7:19 am |

Bill Gross of PIMCO, the world’s largest bond fund in his monthly column releases his April article a few days early (avoiding April Fool’s day? Because the message can’t wait?) called Grim Reality.

Please read his article when you can.

The problem with housing, however, is not the frequently heralded increase in subprime delinquencies or defaults. Of course write-offs, CDO price drops, and even corporate bankruptcies of subprime originators and servicers will not help an already faltering U.S. economy. But foreclosure losses as a percentage of existing loans will be small and the majority of homeowners have substantial amounts of equity in their homes. Because this is the reality of our U.S. housing market, analysts and pundits now claim we’re out of the woods: the subprime crisis is or has been isolated and identified for what it is – a small part of the U.S. economy.

It will not be loan losses that threaten future economic growth, however, but the tightening of credit conditions that are in part a result of those losses. To a certain extent this reluctance to extend credit is a typical response to end-of-cycle exuberance run amok. And if one had to measure this cycle’s exuberance on a scale of 1-10, double-digits would be the overwhelming vote. Anyone could get a loan because shabby credits were ultimately being camouflaged within CDOs that in turn were being sold to unsophisticated foreign lenders in need of yield as opposed to ¼% bank deposits (read Japan/Yen carry trade). But there is something else in play now that resembles in part the Carter Administration’s Depository Institutions and Monetary Control Act of 1980. Lender fears of potential new regulations can do nothing but begin to restrict additional lending at the margin, as will headlines heralding alleged predatory lending practices in recent years. After doubling over 18 months between 2005 and the first half of 2006, non-traditional loan growth has recently turned negative, and lenders’ attitudes are turning decidedly conservative

In order to return to affordability levels of 2003, he illustrates how much rates and prices need to adjust to reach equilibrium. He concludes:

if home prices in the U.S. have peaked, and are expected to stay below that peak on a real price basis for the next three years, then the Fed will cut rates and cut them significantly over the next few years in order to revigorate an anemic U.S. economy.

In other words, to get to where we were, something has got to give in the national housing market. All this talk about inflation concerns is a distraction as the impact on the housing market gradually takes hold of the US economy. The Fed will have to do something about it soon. Perhaps thats why there is only a 50% probability of the FOMC holding interest rates firm by their August meeting.


S&P/Case-Shiller Home Price Indices/January 2007 – Dire?

March 28, 2007 | 7:34 am | |

Professor Robert Shiller has leveraged his repeat sales index by developing a new monthly national housing market report with Standard & Poor called S&P/Case-Shiller® Home Price Indices. I find that repeat sales indexes can be very inaccurate and lag the market because they don’t reflect changes in the houses being measured for multiple sales, the data set is too thin, and the response to sudden changes in a market is delayed. This particular report addresses composites of 10 and 20 metro areas so its not really a national housing market indicator since metro areas are distinctly different markets than outlying areas. However, the index seems to address one of their biggest flaws:

Their purpose is to measure the average change in home prices in a particular geographic market. They are calculated monthly and cover 20 major metropolitan areas (Metropolitan Statistical Areas or MSAs), which are also aggregated to form two composites – one comprising 10 of the metro areas, the other comprising all 20. The indices measure changes in housing market prices given a constant level of quality. Changes in the types and sizes of houses or changes in the physical characteristics of houses are specifically excluded from the calculations to avoid incorrectly affecting the index value.

“The annual declines in the composites are a good indicator of the dire state of the U.S. residential real estate market,” says Robert J. Shiller, Chief Economist at MacroMarkets LLC. “ The 10-City and 20-city Composites are both showing negative annual returns, a striking difference from the 15.1% and 14.7% returns they reported this time last year. The dismal growth in the 10-City composite is now at rates not seen since January 1994.”

Its the first time in 11 years that home prices go negative. A possible theory for the weakness is relating to the interplay between new home sales and existing home sales. I am not sure I buy into it but its interesting to consider nevertheless.

The lag in timing on this index is really showing the markets around the November 2006 election since the study is based on January 2007 closings. At -0.2% and -0.7% for the 10 and 20 city composite, its is a significant drop from the 15% annual appreciation rates seen a year earlier but not unexpected.

I know economists are paid to worry, and I am not cheerleading here, but does Professor Shiller have to use the word dire in his description?

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Hold Out Becomes Island

March 28, 2007 | 6:54 am | |

It is not uncommon for tenants and homeowners to refuse to move out or sellout to developers. They simply don’t subscribe to the argument by the developer that, besides the money, it is being done for the greater good. In order to apply pressure, the developer builds taxpayers, usually one story buildings with short term tenants that pay enough rent to cover the real estate taxes. The developer simply waits, sometimes for decades until they are able to aquire the site.

Here’s an old New York Times article that provides some hold-out stories.

The page one photo in the New York Times yesterday was something more surreal. The Chinese developer simply dug out around them. The homeowners in New London, CT who were booted from their private homes by eminent domain might look at this for inspiration.

Update: More photos.

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[Curbed] Three Cents Worth: If I Had a Dollar for Every Agent

March 27, 2007 | 8:27 pm | | Columns |

Its Tuesday, so its got to be that time of the week to provide my Three Cents Worth as a post for Curbed. This week I observed remarkable consistency in NAR membership and Manhattan housing prices. A pretty silly comparison, but it certainly sparked a heated discussion.

To view post: Three Cents Worth: If I Had a Dollar for Every Agent

Previous Three Cents Worth posts on Curbed can be found here.

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The Fed: Nuances And Transparency

March 27, 2007 | 12:36 pm | |

I think many of us are confused about where the national economy is going at the moment and with that, where housing is going.

The Fed seems to be having trouble delivering a clear message. On one hand, we have been given the impression that inflation is a concern and that housing is not too bad. That makes us worry about rising mortgage rates. Yet on the other hand we are seeing national economic stats slip, suggesting the economy is weakening. Add to that, the troubles with subprime mortgages and tightening credit (and increased awareness of risk by investors).

The FOMC recently changed their bias of action against inflation to neutral in their latest meeting suggesting growing weakness in the economy and raising the odds of a rate reduction in the second half of this year.

Greg Ip, who covers the Federal Reserve for the Wall Street Journal, touched on this market confusion in today’s article Fed Has Trouble Getting Across Nuanced Message

Since then, economic developments have added to the impetus for change. Fed officials had expected that as the housing market slumped, stronger business investment would pick up much of the slack. But business investment has been surprisingly weak; capital-goods shipments excluding aircraft and defense products have fallen in four of the five months through January. February data will be released tomorrow.

While officials still believe demand for housing has stabilized, they acknowledge the recent turmoil in the subprime-mortgage market adds an unpredictable element to the outlook for the housing sector.

These factors, however, haven’t led the Fed to significantly lower its growth forecast. In late February Mr. Bernanke told Congress, “There is really no material change in our expectations.”

Yesterday, Federal Reserve Bank of Chicago President Michael Moskow told an audience in Beijing that “we are expecting the recent softness [in capital spending] to be temporary,” though “we are monitoring developments in investment closely.”

I am not sure how the deterioration in the subprime market situation, which wasn’t as apparent a little over a month ago, won’t change economic expectations. It will likely cause credit to tighten on Alt-A and prime mortgages, tempering demand, when the market is already vulnerable. The national housing market simply hasn’t had a chance to influence the national economy at full force because the underlying factors such as employment seem to be pretty good.

What does this mean to housing? [Translated] Well, things are pretty good, in not such a bad way yet we must be concerned and need to deal with it carefully and look at the indicators to make sure we are moving along in the right direction in case something thats not so pleasant actually happens that we haven’t prepared for in a careful thoughtful manner. Got it?

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Houses Can’t Walk

March 26, 2007 | 7:36 am | |

Ever since I was a kid (just a few years ago), I had always had a dream of owning my own home. It always gnawed at me and, after starting a business, marriage and kids (not necessarily in that order), my wife and I finally bought a house. Admittedly, it was a happy moment, a personal goal not unlike many of my peers. The American Dream.

In fact, on the day of the closing, I had only been home a few days from the hospital after a bout with viral meningitis. I couldn’t stand upright without experiencing a severe migraine, but I insisted on attending the closing, despite repeated offers by my attorney for a power of attorney. It was that important to me. We had successfully entered that land of pride, happiness and tax deductions.

Thinking Macro

When I came across this interesting article in Slate called The Renter’s Manifesto (via Greg Mankiw’s Blog) which basically says that homeownership causes unemployment. This conclusion is based on the work of English economist Andrew Oswald

Its “home” to me because I have family in Detroit, MI.

Big cities can struggle if they overspecialize and then find that times change. Detroit is an example. So is Manchester in Northwest England. Birmingham, in the English midlands, is a different story, a city bustling away, making everything and nothing in particular. As the wise economy-watcher Jane Jacobs once pointed out, Birmingham was thought highly inefficient compared with the specialized mills of Manchester, but when the downturn came, Manchester was devastated and Birmingham kept on chugging along. Chicago, Seattle, New York, and London have similarly reinvented themselves again and again.

The work force in a city that has specialized labor is less able to adapt and move. His theory is that home ownership makes occupants less agile.

No matter how bad things get in Detroit or Treorchy, the houses will still be there, and if they are cheap enough, people will want to live in them. The likely result is a gloomy sort of segregation: Those who feel that they can find a good job in the boom cities will move there and pay the higher rents. Those who are less confident of that would rather have no job in a cheap house than no job in an expensive house. Detroit will have residents for a long time to come.

Perhaps I will avoid thinking macro, it gives me a headache.

Important Update: I am second in our March Madness pool…need Florida to win it all to clinch and crush my kids in the standings (ok, ok, I take that back, I get a little carried away…)

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Real Deal Totals Lincoln Center

March 26, 2007 | 12:05 am | | Public |

90. entire panel laughing

Well, Real Deal magazine sold out their “Science of Real Estate” New Development Forum at Lincoln Center last week. It was an event! Over 3,000 tickets were sold.

Some thoughts…

  • It was the first real estate event in the history of Lincoln Center.
  • It was the first sellout event in 2007 for Avery Fisher Hall at Lincoln Center.
  • Amir and Stuart proved once again, that they are truly unable to think small.
  • Additional confirmation that the backstage green room, is never green.
  • Amazed that Fritz was able to crash the green room.
  • Glad that Cathy H picked Real Deal red.
  • The constant and very loud church bells that ring behind the black curtain.
  • The spotlights were so bright, I now know how a deer feels.
  • Steve Cuozzo was our fearless conductor.
  • Admiring developers Kent Swig and Steven Ross’ incredible knowlege and the lion’s share of questions.
  • New understanding for the looming 421a tax abatement expiration.
  • Memories of bursting with answers and comments, but couldn’t figure out how to get a word in.
  • Appreciated Amanda Burden’s stance in not apologizing for critics accusations of micromanagement.
  • Wished Professor Shiller would not be so apologetic for his contrarian views on housing. He’s a smart man and has a lifetime of work to show for it.
  • Kudos to Pam Liebman of Corcoran and Bob Knakal of Massey Knakal for asking the first questions of the panel, achieving a strong pr play without being on stage.
  • Relieved that so many other people aside from myself have real estate centric existences.
  • Glad to get that free chocolate bar in the Real Deal goodie bag.
  • Sure that The Real Deal has been around longer than 4 years.

86. Miller Cuozzo 5. Shiller and Burden 68. Pre-event over shot room filled

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[In The Media] In Focus/Bloomberg, Nightly Business Report/WNET, Fox & Friends Clips

March 26, 2007 | 12:01 am | | Public |

Media appearances kind of snowballed this past week, so please indulge me. I promise to get back to more granular real estate analysis this week.

[March 26, 2007] Page Hopkins of Fox & Friends did the live interview with me and asked great questions. Admittedly my topic was wildy general and the basic message was: National housing stats are irrelevant and you need to look at your local market. Housing stats are trailing indicators and you need to look at economic indicators. Investment windows are more likely to be 5-10 years, much long than what many are accustomed too. Page said I said it was time to buy a second home and I am not sure where that came from – didn’t say that. Also spoke with the other two anchors in the green room and the weatherman. Nice people.

[March 22, 2007] The live Bloomberg TV interview was with Brian Sullivan, who is the host of a new show called In Focus, that airs every business day from 12-2pm. He’s a high energy person, seemed very nice. I love doing interviews at Bloomberg headquarters in Manhattan. Its all new, very high tech, runs like clock work, they spray the makeup on with a hose and best of all, the food is free.

[March 19, 2007] The Nightly Business Report interviewed me for the series: A Tale of 3 Cities which tracks the housing market in 3 US cities with Manhattan being the first. Suzanne Pratt was the very sharp reporter for the Manhattan segment and also is one of the anchors for the show.


Who Took My Square Feet?

March 23, 2007 | 12:05 am | |

In Robert J. Bruss’ column on Inman News Where’s my missing 28 square feet? [Subscr]

DEAR BOB: In August 2004, I purchased a junior one-bedroom condo, advertised as “approximately 551 square feet.” A week ago, I receive a list of recent sales in my building from the realty agent who sold my unit. It listed the condo like mine three floors above me, which sold at 523 square feet. That is 28 square feet smaller than I was lead to believe. If my math is correct, based on my purchase price I overpaid by $11,180 in square-foot value. Is “approximately” a common wording realty agents use to inflate the square footage and price? Should buyers be responsible for verifying this? The appraisal didn’t evaluate size. What advice do you have on recouping the misrepresented square footage and associated value? –Daniel R.

DEAR DANIEL: Have you measured the square footage of your unit? Maybe the upstairs unit is different. Unless you can prove you paid on the basis of the advertised square footage, such as $200 per square foot, you would have a very weak case to prove misrepresentation.

Most real estate listing information includes “weasel word” disclaimers such as “Information deemed reliable but not guaranteed.” You said your condo was advertised as “approximately” 551 square feet, indicating there was no specific representation.

Here are some thoughts:

  • Who says the other unit size was correct? (My cynical side says it was).
  • Most condo markets likely don’t show this type of precision.
  • Offering plan methodologies for square footage measurements might vary building by building unless there are specific local government restrictions.
  • An appraiser is not an architect. In condominiums, the appraiser will measure but test against the recorded measurement in public record or approved by the government authority that oversees the offering. In New York, its the attorney general. How could the appraiser not look at square footage?
  • Some developers (in New York) have been including common areas in the interior calculations. While legal if disclosed, it strikes me as unethical.
  • Shouldn’t the figure in public record always be used as the official number? I am surprised how often this number isn’t used.
  • Why would the broker use a smaller square footage later if they were systematically exagerating as the complainer infers?

I don’t see how this buyer can do anything if all those disclaimers were used. I would bet that any two architects, any two brokers, any two appraisers who measured this unit would not come up with the exact same result.

[In The Media] SmartMoney TV Clip for 3-21-07

March 23, 2007 | 12:01 am | | Public |

This was a segment by SmartMoney TV. Its pretty basic advice for homeowners thinking of selling. Hey, do your research first before you do anything else.


[Fee Simplistic] The Perfect Storm: Is Appraising the New Sweatshop Profession?

March 22, 2007 | 9:01 pm |

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, he chews the fat with us about the easy credit syndrome and begs the question: “Do you want fries with that?.” …Jonathan Miller

This past Wednesday the Wall Street Journal reported on how US auto parts suppliers were successfully resisting the price-cuts demanded by Detroit’s Big 3-GM, Ford & Chrysler. The article explained how attrition among the US parts suppliers through bankruptcies, consolidations, etc. had resulted in giving the remaining survivors the necessary leverage to resist Detroit in price reductions demanded by the Big 3 in their attempt to lower costs. Thus with fewer plants, smaller operations and lower overhead the suppliers did not have to take on unprofitable contracts in order to keep their plants busy as they were now more efficient than in the past.

Compare this to the current state of the appraisal industry and you will find the exact opposite in terms of the relationship between supply and demand. The appraisal world has burgeoned over the past decade as a result of the vast residential and commercial CMBS market that has sopped up the investment capital pouring into US real estate. Preceding this boom, however, the supply side of appraisers had already expanded thanks to the enactment of FIRREA in 1989 in answer to the savings and loan debacle in the mid- late 1980’s when state certification enabled every Tom, Dick and Harriet to take a core of appraisal courses, pass a test and hang out their shingle as either a residential or general property appraiser. Moreover, and equally as important, many of these newly hatched appraisal savants were single practitioners operating out of their basements with no staff and little overhead. This is not meant to belittle the capitalistic society in which we operate but merely to set the competitive scene.

To handle the growing volume of deals and the expanding need for appraisals as well as keeping their overhead costs low the financial institutions commoditized the appraisal process and resorted to on-line standardized engagement letters that gave almost no information to the appraiser as to the number of tenants on the rent roll other than being told it was an office building or single-user industrial building, along with the property’s address and a contact name and telephone number; organized the lending process into a production line so that the loan officers had little knowledge of the collateral. Anecdotally, in the large bank that I worked for I found myself fielding requests for appraisals from our out-of-state branch offices whose customer/borrower may have banked at that location but whose property was somewhere back in the New York area (when I requested information about the property, its gross building area, rent roll, leases, etc. so that I could talk intelligently to the various appraisers in order to obtain a fee quote and timing in many instances the field office had no basic property information). To handle either appraisal reviews and/or engagements (especially by the smaller institutions) banks retained appraisal management companies (AMC’s) to administer the process. And thus conditions for the PERFECT STORM in the appraisal world were set in motion:

  • growing appraisal volume
  • growing appraiser supply
  • 3rd party AMC’S under orders to obtain lowest bid fees
  • newly minted appraisers eager to obtain work
  • AMC’s & institutions able to exploit the appraiser oversupply
  • contented client-lenders able to comply with FIRREA/USPAP minimum standards where any appraisal mistakes were bailed out by geometrically rising sales prices

Fast forwarding to the present and the various SOAPBOX articles of my fellow bloggers reporting manifestations of today’s appraisal business world: lenders shopping to see if the appraiser can support the loan/value amount; a quick “verbal” value before the written report arrives and any other quirky requests to prevent the deal from being lost due to the appraisal and it is apparent that business can be rough.

There is no question that today’s appraisal world has been transformed into a high volume rush business stoked by Wall Street’s need to keep the bonfires of CMBS in ample supply to sop up the large capital flows seeking investment outlets. The vast volume of business means that the originators, lenders and underwriters are the bosses while the appraisers have become the sweatshop workers if they want the business. State certification of appraisers has raised the supply of people willing to work at sweatshop fees. As often cited in SOAPBOX commentary, appraisers have become “form filler-outers” and downloaders of web-based data, sales comps and practitioners of applying sales price or rental rate averages to subject properties. Lucky is the appraiser if Co-Star has a photo of the selected comps. If not, a trip to the field may be mandatory if the reviewer does not accept the caption: “no photo available”. Gone is the appraiser who can look his client in the eye and say-“you know what, my experience tells me that market value is not represented by the average of the sales comps and here are the reasons why”.

If I have given the impression that appraisers are being paid for their production and not for their ability to discern market value based on market dynamics you are not mistaken.

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