I’m looking forward to moderating a great REBNY panel for the Residential Brokerage Division Owners and Managers Breakfast on June 13th. Owners/Principals of Residential Brokerage Firms and Residential Managers can signup here.
We took a look at the pocket listing phenomenon in Los Angeles.
I’ve been authoring an LA housing market report for Douglas Elliman as part of their expanding Elliman Report series I’ve been authoring for 23 years. The report covers their firm’s LA footprint, namely the Westside, Downtown and other areas including Malibu.
Aside from Brooklyn, this housing market is one of the most robust we covered in 1Q17. Price growth, elevated sales and sliding inventory remained the theme.
We matched public record closings with properties listed on the MLS. Those sales missing from the MLS were either FSBOs or “pocket listings.” I don’t have a great way to separate the two at this point but I’m inclined to believe the higher the price, the more likely the sale was a pocket listing.
The chart shows that about 19% of all sales are not shared through the MLS. But even more interesting is the pattern shown by price. Approximately one-third of all sales over $5 million are missing from the MLS.
Because I’m a little behind, the awesome infographic below by Michael Kolomatsky appeared in the New York Times real estate section a few weeks ago: How Much Is Your House Worth Per Minute?.
My original version covering Fairfield County was so popular they wanted me to do recurring versions. This one was much harder since there wasn’t an obvious “sweet spot” but the concept was the same. And best of all, it’s pretty darn cool.
Well here’s a first for me.
Our Manhattan parking stats were compared with the average value per acre of agricultural land in FarmLife magazine.
In 25 years, the cost of an acre of agriculture farmland rose 309% while a Manhattan parking space rose 855% over the same period. Cost? $7,700 per acre for California agricultural land versus $55.5 million per acre for a Manhattan parking spot.
Gotta love this comparison.
UPDATE A colleague pointed out that we don’t know how large the average farmland was or whether it had reasonable access to water and electricity. I pointed out that Manhattan parking spaces don’t have electric and water service and seem to be about 100 feet from the elevator. LOL.
Note: I have been a subscriber of Valuation Review and it’s predecessor for years. It provides a wide perspective on the appraisal industry and I’ve always got something out of it. Over the past few years, I’ve noticed that the voices in the magazine seemed to be skewing more and more towards national level AMC executives. I suspect the PR departments of these firms make their top executives readily accessible washing out the voices of individual appraisers. So I sent the editor a note offering another perspective with links to my content. He was immediately interested in getting another voice so he interviewed me.
From the Wednesday, March 22, 2017, Valuation Review Article: CEO suggests appraisal industry comprised of ‘lone wolves’.
Reasonable compensation, lender and AMC issues are constantly on the mind of the appraiser. When things aren’t falling into place, the process of assigning blame kicks into high gear with appraisers continuing to look for guidance.
“That’s the problem in that there really isn’t any leadership for appraisers to follow. The false narrative of an appraisal shortage continues to be pushed by AMCs, unfairly tarnishing the image of individual appraisers,” Miller Samuel Inc. President and CEO Jonathan Miller told Valuation Review. “When an industry takes a 50 percent pay cut overnight, good people leave or struggle to hang on and weaker players are attracted-which equals problems. But is it the fault of the remaining individual appraisers?
“AMCs are at a seminal moment,” Miller added. “In what other industry does the company managing the talent get about the same compensation as the talent them? An agent representing a Hollywood actor isn’t going to get $1 million if their client is receiving that same amount for a movie role. It is a broken model.”
Like many in the appraisal profession, Miller strongly believes that there is not a shortage of appraisers. In fact, he more than challenges one reason for such a shortage is that too many burdensome regulations are being placed upon appraisers.
“There is a shortage of appraisers willing to work for 50 cents on the dollar,” Miller said. “The AMC model has hit a wall. AMCs have run out of new people willing to work for 50 cents on the dollar. Sadly, consumers think appraisers are getting the appraisal fee stated in their mortgage documents. They aren’t and typically the appraiser receives as little as 50 percent of it.
“The Appraisal Institute says there is a shortage of appraisers and seem to be championing the AMC concept but appraisers don’t understand why,” Miller added. “I’m not against AMCs; rather, I’m against the execution of business by the AMCs. They treat appraisers as a commodity rather than a professional service.”
For the rest of the story, visit here.
My friend and colleague Constantine Valhouli, founder of NeighborhoodX pens an excellent piece on how the analytics that can be derived from raw data separates seemingly similar real estate resources. And he loves price per square foot. I serve as an advisor to his firm as well as a co-consumer of caffeine whenever possible. He may periodically drop in here on Matrix with some insights derived from his neighborhood analytics.
-Jonathan J. Miller
When data becomes a commodity, context, and analysis for that data become a critical point of differentiation. This is particularly true for real estate data.
The major real estate portals active in New York City – Realtor, StreetEasy, Trulia, and Zillow – are all relying on the same underlying data: listings from real estate brokerage firms, multiple listing systems and public record. As a result, what differentiates one portal from another is the user experience. This UX is a combination of the (hopefully) intuitive site navigation and the contextual information that helps users make more informed decisions about the various listings.
Those three factors – listings, navigation, and contextual information – come together in the search functions on a real estate portal.
Why? Even as the web has streamlined the housing search, it remains cumbersome. We’ve previously analyzed how the same search on different portals will yield different number of listings for the same neighborhood (Austin, Boston, NYC) – which means that buyers will have to duplicate their search across several portals to be sure they are finding all the relevant properties. Other times, the listings aren’t actually in the neighborhood they claim to be. All of this puts the burden of analysis onto the site user.
The real estate search recently became even more cumbersome and opaque. The major real estate portals which are active in New York City no longer have an option to sort properties by price per square foot.
On these portals, users can search by most or least expensive, by largest or smallest, or by newest – but these metrics are not as useful as looking at price per square foot. Sometimes a large property that appears expensive can be a bargain on a per-square-foot basis. Other times, some of the least expensive properties in a neighborhood are asking the highest prices per square foot for that neighborhood. The ability to sort listings by price per square foot is a minor feature, and relatively easy to implement. But the omission speaks volumes. Without this option, it is no longer possible for consumers to quickly sort properties to get a better sense the price/sq.ft. range in a neighborhood. Or to know whether a particular property is asking too much (or is a relative bargain) compared to the neighborhood. This also means that it is harder for sellers to value their property accurately.
Some people are their own worst enemy. And that old saying also applies to financial institutions.
With all the talk about revisiting, gutting or eliminating Dodd-Frank, a significant part of the problem with mortgage appraisal related lending actually exists within the bank risk management themselves. Their over-interpretation of what the regulations require gives outsiders the impression that appraiser related regulations or standards are more onerous than they actually are.
Fannie Mae Allows Trainee Inspections Without Their Supervisory Appraiser
One of the biggest issues today is the lack of mentoring by experienced appraisers because it is not financially feasible under current lending practice. Both banks and AMCs – who act as a bank’s agent – generally do not allow trainees to inspect a property without a licensed or certified appraiser alongside. So in an era where AMCs control as much as 90% of mortgage appraisal work, the lenders are requiring AMCs to require something the GSEs (the party buy their mortgage paper) do not require. This risk aversion is residual from housing bubble collapse. Mortgage lenders today, subjected to low rates and a very narrow rate spread, remain irrationally averse to risk.
However, their underwriting risk management is effectively destroying the future quality of appraisals that will be done on their collateral because the new wave of appraisers is essentially only book-smart without real world context (mentoring). Experienced appraisers can not afford to invest the time to inspect the property with the trainee (in addition to their own inspections) for the multi-year experience period before the appraiser is certified after already taking a 30% to 50% overnight pay cut from AMCs.
From the Fannie Mae Seller’s Guide Update – 2017-01 page 2.
Reporting “Material Failures” to State Boards
In reference to appraisal oversight, let’s consider how banks determine whether an appraiser is reported to their state licensing board.
Dodd-Frank says the following in 12 CFR 226.42(g)(1). Whereby a lender has to report an appraiser for…[bold, my emphasis]
(g) Mandatory reporting—(1) Reporting required. Any covered person that reasonably believes an appraiser has not complied with the Uniform Standards of Professional Appraisal Practice or ethical or professional requirements for appraisers under applicable state or federal statutes or regulations shall refer the matter to the appropriate state agency if the failure to comply is material. For purposes of this paragraph (g)(1), a failure to comply is material if it is likely to significantly affect the value assigned to the consumer’s principal dwelling.
When the CFPB was asked what they meant by a “material failure” – the following table shows the difference between material and non-material. So how much is a material failure? A value off by 2%, 10% or 30%?
And by the way, the third option for reporting a material failure seems absurd although I suppose it has to be said – Who is dumb enough to admit that they accepted the assignment because they knew they would “make the deal” happen. The obvious lack of a definitive paper trail in such a situation makes this very hard to prove.
I’ve always had a problem with setting rigid rules in considering the concept of appraisal oversight. With valuation expertise, how does a state agency apply hard rules to value opinions, comp selection and adjustments, etc.? There needs to be a great deal of latitude for regulators and an “I’ll know it when I see it” approach should be allowed.
Separating gross negligence from negligence
Here is the rule.
“Performing an appraisal in a grossly negligent manner, in violation of a rule under USPAP.”
While subjective, it represents a very severe extreme to which an appraisal would be reported to a state board. The rule goes on to say…
“Accepting an appraisal assignment on the condition that the appraiser will report a value equal to or greater than the purchase price for the consumer’s principal dwelling, is in violation of a rule under USPAP.”
But big national mortgage companies today like Wells Fargo and others are reporting appraisals to state boards where the value is not supported. ie weak comps, unreasonable adjustments, etc. Reports with those issues may, in fact, be negligent but do not fall under the definition of gross negligence. Let’s not wreck an appraisers career because they missed some better comps. Once these reports are referred to the state, the state must investigate. It opens up the appraiser to more risk of unintended consequences. Think of a scenario where a cop pulls over a driver for a missing taillight and learns that the driver doesn’t have his wallet with him.
Gross negligence requires a much higher test than applying it to an appraiser who is just being stupid.
It is defined as:
Gross negligence is a conscious and voluntary disregard of the need to use reasonable care, which is likely to cause foreseeable grave injury or harm to persons, property, or both. It is conduct that is extreme when compared with ordinary Negligence, which is a mere failure to exercise reasonable care.
Bloomberg maintains 6 quarterly charts on their terminals covering the Manhattan luxury sales and rental results we compile. I periodically throw these charts on this Matrix Blog only because I find myself asking…how cool is that?
Speaking about the state of the real estate market tomorrow morning. Looking forward to it! The cool graphic below is enough of a reason to attend. 😉
The original invite graphic was also pretty cool.
Almost two years ago the real estate new development world was rocked by the New York Times epic page one story by Louise Story and Stephanie Saul about foreign investment in U.S. real estate. The vehicle for “Towers of Secrecy” purchases was the ubiquitous LLC shell corporation. While I’m no advocate of illegal activity for the sake of preserving the health of a real estate market, I was very skeptical and outspoken about the challenge of measuring the impact of this new rule. Especially since the new development market had already started to show signs of over supply by mid 2014 in both Manhattan above $3M and Miami above $1M. It also seemed to single out wealthy buyers who did not want to get a mortgage. How could the effectiveness of this six month rule be measured reliably enough to be extended or made permanent when the market was already falling?
Since these series of articles came out, I have learned a lot more about the scale of kleptocracy around the world and more appreciative of what the rule attempted to accomplish.
Fast forward to 2017 and the super lux (≥$5M) new development condo market cooled sharply. The rule has been extended but is now up for renewal in a month. It is not clear whether the new administration will renew it. Nicholas Nehamas of the Miami Herald penned are great recap of the rule status. To make it even better, he included a YouTube video of bulldozers playing chicken in the piece.
I have to say I admire the messaging that came out of Homeland Security to justify the rule’s impact. Whether or not the following is an exageration, the mere existance of the rule is probably an effective deterent.
“We don’t come across [money laundering in real estate] once every 10 or 12 cases,” said John Tobon, U.S. Homeland Security Investigations Deputy Special Agent in Charge for South Florida. “We come across real estate being purchased with illicit funds once every other case.”
Here are the areas current covered by the Treasury rule.
Using the parameters of the rule, the Miami Herald asked that I analyze sales in the five boroughs of NYC since enactment. I stuck with condos and 1-3 families since co-ops tend not be a preferred property type of foreign buyers. I found that sales dropped 6% year over year for the aggregate of Manhattan sales over $3M and the outer borough sales of $1.5M. This included legacy contracts that closed during the rule enactment period but went to contract before it started. Those sales likely softened the actual decline in sales.
While it appears reasonable that the rule had some drag on demand, a possible repeal in February won’t likely have much of an impact on the oversupply that currently exists.
I added my chart on bidding wars below – falling as supply enters the market, causing resale prices to soften.
I had another great conversation on Voice of Appraisal with Phil Crawford. The conversation centered around AI National’s “taking” policy debacle, my repository for all the documents on this matter (realestateindustrialcomplex), the viral outrage that has overtaken the appraisal industry, released from my first of several Matrix posts on the topic: Sadly, The Appraisal Institute is now working against its local chapters.
We also spoke about RAC, an appraisal organization I’ve been a member of for two decades and recently became the president. RAC works for its members.
Aside from Phil’s dreamy radio voice, he shares a lot of great content each week for appraisers. Well worth a regular listen.