Matrix Blog

Archive for June, 2008

[Attitude Forecast Flies] Warm & Fuzzy Logic By Gloomy Or Happy Shiny People

June 30, 2008 | 10:11 am | wsjlogo |

Hey, admit it – most of us are confused about the state of the economy and housing. The increasing number of solutions and policy provided by government and through politics seem to make matters worse. There is more information out there than ever before.

In fact, it’s enough to accept the idea that ignorance really is bliss. Just ask a happy fly.

Absent of hidden agendas and built-in bias in many reporting sources, the abundance of macro data can’t lay it all out because it’s backward looking. I definitely see all of this in the coverage of real estate in the New York region and I am sure the same thing goes on in most markets.

Its less about the macro data and more about interpretation of the data to yield a coherent and reasonable picture of the future. This gets back to understanding what value is (aka housing prices) – a current perception of a future condition as it relates to a specific property.

But perception varies widely across demographics (that’s why the Dodd bill using the term “true value” is so crazy)

Education, income and party all seem to play a role in the shade of rose-colored glasses worn:

More Gallup charts here.

Baby boomers see the glass as half empty and since they are the largest demographic portion of the economy, it influences the overall media coverage on all things economic.

Since we are a consumption economy, forecasts on consumption (and it’s impact on housing or housing’s impact on consumption) tendencies might be more accurate using more warm and fuzzy indicators like the University of Michigan’s Index of Consumer Sentiment.

  • First, while most other macroeconomic data report what already happened, the ICS data report on consumers’ views about their own and the economy’s recent, current, and expected economic conditions.
  • Second, consumer attitudes may incorporate households’ estimates of the impacts of rare or even unique shocks, whose effects cannot be directly estimated from past experience or data.
  • Third, households’ answers might reflect changed expectations and uncertainties about future conditions that have not yet occurred.

But only when the economy is weak…

Consumer attitudes are more reliable as a forecasting tool when the economy is weak.

With all the flies buzzing around, I’m feeling a bit agitated (idea: that could mean greater accuracy).


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[Deflating Expectations] FOMC Shifts To Neutrally Unsure

June 29, 2008 | 10:46 pm | nytlogo |

The Federal Open Market Committee was widely expected to raise rates a few weeks ago amid growing concerns over inflation. However, that concern eased in recent weeks as it became apparent that the overall economy was still weak and the rate was left unchanged.

Repeat of last month’s hint: Housing AND inflation

I would doubt there will be a change in the federal funds rate until after the election – a coincidence I am sure [wink].

Here’s a great discussion on Fedspeak and the Feds’s political connections by Holden Lewis over at Bankrate.

But assuming not much fixing happens until after the election, can the next President actually do anything about the state of the economy?

Here are the minutes from the last meeting:

Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

Of course, as Congress struggles to pass legislation to ease some of the homeowner pain (which, as a body of government, I feel the issue is far too complex for them to arrive at an effective solution because excessive compromise is the result), mortgage debt is snowballing.

Hurry up.

Although 71% of Americans describe the federal government’s economic policies as bad, a recent Harris Poll found that More Now Believe Their Household’s Financial Condition Will Improve in Next Six Months.

Huh?

I think it’s not just the Fed that’s unsure about the economy at the moment.


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Even Storied Book Publishers Didn’t See The Pressure

June 26, 2008 | 1:54 pm | nytlogo |

My business partner John Cicero, of Miller Cicero, our commercial appraisal firm ran across a pretty interesting book released by McGraw-Hill last year, a well respected publisher.

Here’s an excerpt from the book: The Complete Guide to Financing Real Estate Developments (Hardcover) by Ira Nachem (2007, McGraw-Hill, New York), List price $79.96.

Since appraisers want to continue to receive assignments, they generally have a desire to satisfy you, their client. You sometimes can play on that desire and get the appraiser to produce a report with values a bit higher (or lower) than he otherwise would report….If you want to make sure that the appraiser is not undervaluing the property, you should tactfully indicate your concern up front…

In other words, its important to pressure the appraiser – in fact, it is part of a strategy to be a successful developer. Of course with the changing credit market landscape, I would think the lessons learned from this book are now limited. Still, it is quite shocking to me how cavalier this quote is and how commonplace it probably was.

For more details, take a look at John’s post over at my other blog Soapbox.


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[Commercial Grade] Lending 101

June 26, 2008 | 1:40 pm |

Commercial Grade is a post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is, depending on what day of the week it is, one of the smartest guys I know. …Jonathan Miller


I think that I finally understand what the problem is.

We just need to go back to basics and make sure that the real estate lenders are being property educated. I recently came across a textbook written for lenders: The Complete Guide to Financing Real Estate Developments (Hardcover) by Ira Nachem ( 2007, McGraw-Hill, New York), List price $79.96. Seemed like a respectable enough book, which is why my jaw dropped and I had to read the following section three times to make sure that I wasn’t imagining things

A section in Chapter 5 with the heading “Influencing the Appraisal”,

Since appraisers want to continue to receive assignments, they generally have a desire to satisfy you, their client. You sometimes can play on that desire and get the appraiser to produce a report with values a bit higher (or lower) than he otherwise would report.If you want to make sure that the appraiser is not undervaluing the property, you should tactfully indicate your concern up front

Do you believe this stuff?!

As I was reading this I kept on waiting for Alan Funt to jump out and tell me that the whole thing was a joke. He didn’t. (I guess he couldn’t since he died in 1999.)

It gets better

A third reason to go against a conservative valuation involves market conditions and competition among lending institutions. When more lenders are in the market, competition for business increasesTo be more competitive, loan officers who receive higher appraised values can make larger loans

Over the years I’ve spoken to numerous loan officers that truly don’t have a clue as to how the appraisal function is supposed to fit into the underwriting process. Unfortunately books like this do little to educate them.

I look forward to reading future books in this series: “Shmearing the Building Inspector” and “Tax Evasion for Dummies”.


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Curvilinear MPG With Benefits, While Confidence, CSI and OFHEO Meet Expectations

June 24, 2008 | 11:08 am | nytlogo |

…and those expectations are continued weakness.

The focus on oil and fuel efficiency of cars seems to be taking over the BBQ conversation from housing these days.

the relationship between consumption and m.p.g. is curvilinear, and there is a greater savings at lower m.p.g.’s. Over 10,000 miles, the 28 m.p.g. car uses 198 fewer gallons than the 18 m.p.g., more than double the savings of the 50 m.p.g. car compared with the 34 m.p.g. one.

With this new measure, the researchers suggest, consumers would more easily see the value of swapping an inefficient car for one that is even just modestly more efficient.

Speaking of curvilinear relationships, check out this recent ad in Craigslist. A friend of mine is having great difficultly finding an apartment. Apparently this landlord has the answer.

Today is just full of fun announcements…

Isn’t it summer Being outside, enjoying the sunshine? Optimism? Consumer Confidence plunged to a 16-year low in May.

As expected, the S&P/Case Shiller Index showed continued decline in April, the beginning of the “spring market” when sales activity is most robust. In fact, it showed a record decline for its 20 year history. I think there was hope brewing that the housing market is approaching bottom. It’s hard to see that with a 15.3% annualized decline and a 17.8% decline from peak.

Of course, OFHEO released their numbers today as well and guess what? OFHEO shows the housing market is declining 4.5% annually (over the same period that Case Shiller measures). That’s because CSI includes the entire price spectrum and OFHEO excludes non-conforming mortgage sales. It is interesting how much the data gets skewed by the high end market. Based on the difference between these two indexes, the high end is tanking (no pun intended).

Tomorrow, the FOMC announcement is on tap. The futures markets are betting on no change in rates. I would think further rate cuts will hurt the economy by empowering inflation. Rate cuts in the past year have not helped housing in any measurable, even curvilinear way.

At least not enough to get pumped up about (sorry).


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Establishing A Bond With An Appraiser Is Expensive

June 24, 2008 | 7:42 am |

This post was also presented on Matrix.

In one of the more poorly thought out layers of legislation being proposed in Congress to help the housing market and credit problems pertains to the appraisal element within the Homeownership Preservation and Protection Act of 2007. This bill is being championed by US Senator Dodd. The whole concept of bonding the appraiser demonstrates a lack of understanding of how we fit into the lending process.

I’ve touched on this legislation in a previous post about how the act misses the mark because it provides no tangible solution to the appraisal element of the mortgage lending process (emphasis added: no). The legislation seems to be stuck at the moment but I am not so sure how long that will last.

Because I am familiar with the topic (it’s my profession), it really scares me to think of the thousands of pieces of legislation that are crafted in bills by Congress every year that are probably just like this one. I am sure Senator Dodd’s intentions are honorable, but the bill completely misses the issue at hand.

A key concern brought up by this bill is the cost of bonding an appraiser. As if obtaining a bond makes an appraiser suddenly ethical and/or not subject to intensive, economically incentivised pressure?

Since I have never had to obtain a bond, I am not completely confident of my thinking here, but I suspect I am on the right track:

The Dodd legislation says:

Appraisers must obtain bonds equal to one percent of the value of the homes appraised.

Ok, so if I say Miller Samuel appraises $5,000,000,000 worth of Manhattan real estate in a year, that amounts to a $50,000,000 bond (1%).

I couldn’t find any published quotes for appraisal surety bonds, but if we say the cost is 2% of face value of the bond, then $50,000,000 x 2% = $1,000,000. In other words, our firm will need to spend $1,000,000 this year in order to comply with legislation that does nothing to address the problem (insulating appraisers from pressure).

Issue 1: If appraisers wish to remain in business, they will have to pass along the costs to their clients (ultimately the consumer in most cases). Common sense says that most appraisers will be forced out of business or no longer perform appraisals for lenders if this interpretation is correct.

This means I have to pass costs of $1,000,000 to my clients (appraising is a razor thin margin business). That really means I am going to have to raise my fees many times just to break even and I am doubtful that my client base will readily absorb the significant increase in fees. As I mentioned in the prior post, I think this will actually make more good appraisers leave the profession.

Issue 2: Appraisers may have to obtain these bonds individually, not in lump sum as in the example above. Try doing this thousands of times in the course of a year. Additional staffing costs, paper work and time has costs associated with it. Total it up and the bill makes appraisals cost prohibitive and will lengthen the appraisal process.

Issue 3: Appraisers may have to violate their appraisal license when obtaining the bond for each assignment. In order to get mandated coverage, they have to provide the value before doing the appraisal (it’s called “cart before the horse”), a direct violation of the licensing law mandated by Congress in 1989 via FIRREA/USPAP. I would think the appraiser’s value estimate for the bond would error on the high side to make sure the property is covered, adding even more costs.

Admittedly I am not familiar with the cost and process of obtaining a bond so I would welcome feedback and insight on this. I am amazed how little information exists out there. Nothing of significance has been written about bonding appraisers that I am aware of.

Appraising is my profession. Lack of common sense is now my bond.

UPDATE: I have been told that the cost of the bond is based on the prior year’s valuation.


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Establishing A Bond With An Appraiser Is Expensive

June 24, 2008 | 12:01 am |

In one of the more poorly thought out layers of legislation being proposed in Congress to help the housing market and credit problems pertains to the appraisal element within the Homeownership Preservation and Protection Act of 2007. This bill is being championed by US Senator Dodd. The whole concept of bonding the appraiser demonstrates a lack of understanding of how we fit into the lending process.

I’ve touched on this legislation in a previous post about how the act misses the mark because it provides no tangible solution to the appraisal element of the mortgage lending process (emphasis added: no). The legislation seems to be stuck at the moment but I am not so sure how long that will last.

Because I am familiar with the topic (it’s my profession), it really scares me to think of the thousands of pieces of legislation that are crafted in bills by Congress every year that are probably just like this one. I am sure Senator Dodd’s intentions are honorable, but the bill completely misses the issue at hand.

A key concern brought up by this bill is the cost of bonding an appraiser. As if obtaining a bond makes an appraiser suddenly ethical and/or not subject to intensive, economically incentivised pressure?

Since I have never had to obtain a bond, I am not completely confident of my thinking here, but I suspect I am on the right track:

The Dodd legislation says:

Appraisers must obtain bonds equal to one percent of the value of the homes appraised.

Ok, so if I say Miller Samuel appraises $5,000,000,000 worth of Manhattan real estate in a year, that amounts to a $50,000,000 bond (1%).

I couldn’t find any published quotes for appraisal surety bonds, but if we say the cost is 2% of face value of the bond, then $50,000,000 x 2% = $1,000,000. In other words, our firm will need to spend $1,000,000 this year in order to comply with legislation that does nothing to address the problem (insulating appraisers from pressure).

Issue 1: If appraisers wish to remain in business, they will have to pass along the costs to their clients (ultimately the consumer in most cases). Common sense says that most appraisers will be forced out of business or no longer perform appraisals for lenders if this interpretation is correct.

This means I have to pass costs of $1,000,000 to my clients (appraising is a razor thin margin business). That really means I am going to have to raise my fees many times just to break even and I am doubtful that my client base will readily absorb the significant increase in fees. As I mentioned in the prior post, I think this will actually make more good appraisers leave the profession.

Issue 2: Appraisers may have to obtain these bonds individually, not in lump sum as in the example above. Try doing this thousands of times in the course of a year. Additional staffing costs, paper work and time has costs associated with it. Total it up and the bill makes appraisals cost prohibitive and will lengthen the appraisal process.

Issue 3: Appraisers may have to violate their appraisal license when obtaining the bond for each assignment. In order to get mandated coverage, they have to provide the value before doing the appraisal (it’s called “cart before the horse”), a direct violation of the licensing law mandated by Congress in 1989 via FIRREA/USPAP. I would think the appraiser’s value estimate for the bond would error on the high side to make sure the property is covered, adding even more costs.

Admittedly I am not familiar with the cost and process of obtaining a bond so I would welcome feedback and insight on this. I am amazed how little information exists out there. Nothing of significance has been written about bonding appraisers that I am aware of.

Appraising is my profession. Lack of common sense is now my bond.

UPDATE: I have been told that the cost of the bond is based on the prior year’s valuation.



Crains New York Business Economic Spotlight Chart – June 2008

June 23, 2008 | 9:26 pm | crainslogo | Charts |

I have had the pleasure of providing a monthly chart for the Economic Spotlight section of Crain’s New York Business magazine since September 2003. Here is the latest, which appears in the current issue of Crain’s New York Business.

Source: Crain’s New York Business

Go here for a complete archive of my Crains’s New York Economic Spotlight charts that have been published. They are organized by year.


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[Foreclosure Bus Tours] Lost In Translation

June 23, 2008 | 4:29 pm | wsjlogo | Public |

A foreclosure storyline is probably better without a tie, no?

Click here to view.

CNBC interviewed me for a story covering the growing foreclosure situation on Long Island and how it is entering Manhattan. Natalie Erlich did a nice job with the piece. The foreclosure tour bus running on Long Island is now entering Manhattan.

Foreclosure bus tours are appearing in other parts of the country. Some with boxed lunches!

What I find fascinating, is that there were only 23 residential foreclosures in Manhattan in Q1 2008 down from 25 in 2007, according to PropertyShark.com

Hardly a significant trend or pattern…no? There must be another justification to run the tours to Manhattan with such a low foreclosure rate. I’m guessin’ it was a publicity play, to contrast the resiliency of the Manhattan market.

UPDATE: Click here to view the second video for the storyline. The disconnect between the number of foreclosures and the ability to run a bus seems to be because there are middlemen that buy blocks of distressed properties before they go into foreclosure and then re-sell for a profit. Sort of an inverse flip.


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Jawboning The Inflation Rock And A Hard Place

June 23, 2008 | 12:01 am | nytlogo |

Source: NYT

Click here for full sized graphic.

In this week’s Off The Charts column, Floyd Norris talks about how inflation has now become the key point of credibility for the Fed. Conventional wisdom says the Fed won’t raise rates in an election year so you could see an aggressive stance in the late fall.

It still seems unlikely that the Fed will actually raise rates in an election year when the economy is probably in recession. But the surprisingly strong increases in producer prices for May, reported by the government this week, increased the pressure on the Fed at least to sound tough about inflation.

In other words, the economy is weak and the Fed can’t raise rates or it will hurt the economy so they need to talk a tough line. A real rock and a hard place.

Unable to raise rates because of a fragile economy, policy makers have to resort to jawboning.

It’s not that they’re insincere about resisting “an erosion of longer-term inflation expectations,” as Federal Reserve Chairman Ben Bernankesaid last week. It’s just that they would prefer not to have to do it now, especially when they expect inflation to recede as demand weakens.

After a brief expectation of an increase, the Fed is likely to keep rates the same this week at the FOMC meeting.

And those expectations, if proven wrong, will eventually converge with reality.

And reality is that the Fed can only assure the credit markets by projecting an image of control. So, despite the severe problems with credit on a global scale, tackling the inflation risk has taken usurped credit risk as the productive course of action.

Still, questions remain about being inflation hawks.

Indeed, if growth slows, people are not likely to eat less rice or corn. And if they have less money to buy new fuel-efficient cars, they will be more reliant on gas-guzzling clunkers.

Why can’t central bankers distinguish structural problems from general overheating? If your only tool is a hammer, everything looks like a nail. But a deliberately engineered recession will only increase economic suffering.

I love the hammer/nail analogy, in fact I picked up the hammer and saw (sorry).

And finally, there is a difference between managing risk and managing volatility.

RISK management, then, should be a process of dealing with the consequences of being wrong. Sometimes, these consequences are minimal — encountering rain after leaving home without an umbrella, for example. But betting the ranch on the assumption that home prices can only go up should tell you the consequences would be much more than minimal if home prices started to fall.

We’ve known that the Fed would have to deal with inflation (The Rock) after it dealt with the credit crisis (Hard Place). Unfortunately, the aggressive rate reductions have not resulted in lower mortgage rates to help easy the housing market pain being felt in many markets.

Improvement in the credit environment will have to wait. Anyone up for Rock, Paper, Scissors?


Just add water: applying water to a rock and a hard place results in tubular commuting (hat tip to Dave Barry).


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