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.
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.
On December 20, 2016 AI President Scott Robinson and AI’s legal counsel called a chapter executive director’s superiors about two posts placed on my REIC website (realestateindustrialcomplex.com) – under the guise of being brand damaging to AI National. This was interpreted as an intimidation tactic. For the record, the posted documents were already widely shared across the industry and there was no personal commentary provided with the posts. In fact, this person was merely posting them on behalf of someone else.
One of the posted documents, the North Texas Chapter’s position paper on the “taking” was already on REIC…if they had taken the time to scroll through it. The second document was the Chicago Chapter’s response to the “taking.” When I heard about this AI National action from multiple sources, I called the chapter executive director and left a voicemail, inviting them to take down the documents if they wanted to because of the threat. After the posts were removed, I re-posted the Chicago chapter letter since the North Texas Chapter letter was already on the site (it was the first document I ever posted on REIC).
I have seen high volume on my REIC site since launch as well as on this Matrix blog and my Housing Notes. However, I have had fewer register on REIC than anticipated based on the traffic. After learning about the phone call and my intention to be transparent on the website with “who said what,” I realized I had not considered how badly damaged the current culture was at AI National and the animosity they show towards its chapters and members. If that’s not an accurate interpretation, I invite Scott to call me and clarify what was said so we can get both sides of this situation and I can share it with our readers. I am only interested in getting the story right.
Therefore I have asked my web developer to remove all registration requirements on REIC to allow anonymous posts (soon – he’s on vacation) – look for the announcement.
Although I am no longer associated with AI specifically because of similar AI National behavior during the exit of TAF, their actions and (mainly) inactions have continued to hurt the appraisal industry. Let’s stop an insulated AI National leadership from causing any further damage to the AI brand as well as the appraisal industry.
Two more thoughts.
Over the past couple of weeks there has been extreme outrage expressed by the chapters and membership of the Appraisal Institute towards “National” leadership and their stealth policy culture. The last straw was “The Taking” policy of nearly all chapter funds and then charging the chapters to manage them. This major AI policy initiative was passed without vetting of the chapters or the membership. I have written about this in two recent blog posts that went viral.
Emails, letters and documents are flying everywhere.
On Thursday it was suggested I set up a central repository for all this information since not everyone in the chapters and membership are seeing all the same information.
So we set one up and it is ready to go. This new web site is a forum that allows users to either lurk or register. If you register you can add content and comments. If you’d rather lurk, that’s ok too since the goal here is to create transparency. I preloaded REIC with some of the information I have. I’m happy to upload information for those of you that are less tech savvy…just use my email address below.
But for now, the best thing you can do is SEND THIS URL TO EVERYONE YOU KNOW and start UPLOADING AND SHARING INFORMATION RIGHT NOW!!!
After last week’s post went viral: “Sadly, The Appraisal Institute is now working against its local chapters“, I thought I’d follow up with additional thoughts on AI National’s chapter money debacle.
On November 18, 2016 the Appraisal Institute Board of Directors adopted their Chapter Financial Management and Administration Policy. I assume most chapter officers are not aware of the details of this major AI financial chapter restructure plan whose policy is officially in place.
Here is a relevant excerpt from the new AI November policy on chapter finances:
Make the phrase “excess cash” part of the professional vernacular going forward. Here is a key detail from the policy:
6. Reserve Fund
a. Cash and Investments Held by Chapters
Excess cash held by Chapters shall be consolidated with the Appraisal Institute’s Reserve Fund Portfolio (“Portfolio”).
In determining the initial deposit into the Reserve Fund Portfolio, cash and investment balances greater than three months of the average monthly Chapter operating expenses will be considered excess cash. The average monthly operating expense will be based on the last three fully closed years.
b. Portfolio Structure
Deposits from Chapters to the Reserve Fund shall be comingled with Portfolio assets, however will be accounted for and tracked separately.
So here’s a hypothetical scenario based on the way the policy reads to me:
Lets say a chapter has $200,000 in the bank. This money was collected from chapter members with their hard earned appraisal fees. The money enables a local chapter to function, bring in guest speakers, cover operating deficits, pay for an executive secretary and other operational items. I already know there are chapters with as much as $100,000 to more than $300,000 in their chapter bank accounts.
Lets say the three year average of my example chapter’s monthly expenses is $5,000. By the AI policy formula, all cash in the chapter’s account above $15,000 (3 x monthly average) will be sent to National. AI has said they will keep records of where the money came from. So in my example, $185,000 ($200,000 less the $15,000 calculated amount) immediately goes to National where it is commingled with other chapter’s funds.
There is a complex (to me) protocol for getting the money back to use at the chapter level. It makes me wonder what happens when a chapter needs money to keep the doors open but doesn’t have it or has a short term financial emergency. For most chapter members who already have full time jobs or a part time executive secretary, the process of getting access to cash at last minute to solve an unforeseen problem seems like an unfair burden. Contrary to the sales pitch given by the president in the previous post, I believe this policy will create additional clerical burdens and reduce the flexibility of the chapters.
As time passes, combined with National’s inability to keep chapters and membership informed in recent years, the details of this “taking” will get hazy as time passes. Over the long term it is unclear what will happen with each chapter’s money. This and other AI policies are being written in such an open ended way, clearly banking that membership or the chapters won’t read it and won’t have a way to stop it once they do. Once National takes most of the money from the chapter bank accounts, the chapters are forever at their mercy. Do chapters really want to be placed in this position?
I recently spoke to an AI member, with a reputation among local peers for cheerleading AI mandates for his own political gain. This person told me that the so-called chapter money was really “National’s money.” I can only believe that such an orientation came from National. I immediately corrected the member, saying that “no, it was the chapter/members’ money.” This position spoke volumes about how National sees the chapters as working for National rather than as National working for the members.
But gets better…
Chapters are literally paying National to manage the chapter fees National has decided to take from the chapters without advanced warning.
Here is a relevant excerpt from the new AI November policy on chapter finances:
Incremental costs (“Incremental Costs”) incurred by the Appraisal Institute Finance Department to execute the responsibilities delineated to it within the Policy shall be funded by a fee payable by Chapters. Incremental Costs represent expenses incurred that otherwise would not have been payable by Appraisal Institute without this Policy and may include, but are not limited to, personnel, technology, banking, audit and tax services. The amount payable shall be calculated for each Chapter as a Base Fee plus a Variable Fee Percent of such Chapter’s average annual expenses. The Base Fee and Variable Fee Percent shall be established by the national Finance Committee, subject to the national Board of Director’s approval, so that total amounts paid by Chapters under this section of the Policy shall reimburse the necessary Incremental Costs incurred by Appraisal Institute to execute its obligations under the Policy. The combined Base and Variable Fee shall be paid in four equal installments on a quarterly basis.
Please get familiar with this policy document and remember that the AI board has already adopted it without vetting it with the chapters. I repeat: this is now an active policy of the AI.
After National takes the “excess” chapter funds (my example of $185,000), it charges the chapter to manage it including costs for additional staff. And even more of a concern, the amount of the fixed plus variable cost structure the chapter will pay has not been determined yet. All AI chapters are effectively losing control of their “excess funds” but don’t know how much National will charge them to manage those funds.
Being penalized for success
Based on the fixed plus variable format, a large chapter will probably pay more than a small chapter for National to manage the chapter’s money. I would argue that the larger chapters are being financially punished by National for being larger. The irony here is that larger chapters reflect a certain level of success by attracting and keeping more members or being able to generate funds for a rainy day. Plus the AI money management process is the same for a chapter with $10,000 in excess funds and one with $200,000 in excess funds. Since the chapter funds are tracked on a spreadsheet or accounting software, the number $10,000 is not easier to enter into a spreadsheet cell than the number $200,000 so the size of the chapter is immaterial. If National maintains that chapter size is material, then the unannounced variable plus fixed management fee should be much larger than if size didn’t matter. I would argue that smaller chapters will require more management than larger chapters, no?
I find the commingling of funds unnerving since membership generally does not trust National leadership and this massive shift in policy was done without communication to the chapters, let alone the membership. The scope of this change is not a simple matter. It should have been vetted on a chapter level if National truly respected their chapters.
Can there be a solution?
Two suggestions for AI National:
I’d like to naively suggest that the National board adopt a chapter level opt in policy so chapters can decide individually whether to allow AI to run their chapter finances. I can see how a few very small chapters that don’t have executive secretaries could be inclined to ask National to manage their funds. However all chapters will be making quarterly management fee payments to National and be subjected to a myriad of rules in this controversial policy. The very idea of an outside party managing chapter funds seems to add more operating burden to understaffed chapters and their executives who already have full time jobs (usually).
The “taking” of chapter funds should be cost neutral. The proposal by National should not cost the chapters a penny. If chapters save operating costs that equals the management fee, then perhaps this can be explored. Otherwise our industry has endured a long term period of fee compression, and this policy simply becomes a money grab by National.
At this point, it looks like the majority of the membership and the chapters are against the AI Board decision to take most of each chapter’s cash.
If chapters resist giving their “excess cash” to National, would it not be too far to suggest that National will nullify the designations of chapter members in a rebellious chapter? Otherwise, what other action could National take to enforce this “taking”? This recent policy and the unrest it stirred has already tarnished the AI brand and will likely accelerate the exodus of existing members. When leadership of an organization is unable to deliver value to their members, the next step seems to be to take something of value from their members. In this case…cash.
The president and board members of the Appraisal Institute demonstrated how little they understand and respect their membership. I believe this is why they enacted a policy to take each chapter’s cash without telling them in advance. As I said in my prior post, AI National is officially obsolete.
Last week a newsletter from John Burns Consulting got big SEO points by exclaiming that Wall Street Has It Wrong: Luxury Home Sales Increasing. Normally his firm is a good source of housing research, but this time they missed the mark on New York City, even when using facts.
While facts are provided and luxury sales are rising in markets like DC, there is a lack of proper context and this is a challenge that national analysts face when looking at specific market subsets. In this analysis, the luxury market was arbitrarily defined as having a $600,000 threshold. In a number of high cost housing markets on the following chart, their luxury threshold is equivalent to the entry or middle market, which I agree, is booming.
I took a look at markets I report on: Kings County (Brooklyn) and Manhattan. Their respective median sales prices of $735,000 and $1,073,750 are higher than $600,000. The John Burns definition for luxury would include more than half of these respective housing markets.
Besides the random threshold selection, their reasons seem to be weak. This list of common perceptions that would explain our underestimate of the strength of the luxury sales market are provided by them. I provide a subsequent clarification for each.
1. New disclosure laws. Foreign-buyer activity has slowed in two high-profile markets, Manhattan and Miami, due to threat of enforcement of new disclosure laws that began in 2016.
The market in both of these markets actually slowed sharply well before the new disclosure laws were in place. And foreign buyer participation in NYC has long been over-hyped.
2. High-profile Florida second-home markets. High-priced homes have indeed slowed in two of the highest-profile second home markets in the country, Naples (Collier County) and Palm Beach. These are two of the six counties where sales have declined.
Again county-wide prices set way below the actual luxury market may be the problem. Within Palm Beach County, I cover Palm Beach and the luxury market starts just below $5 million. In arguably the most expensive city in this county, the median price for all property types is just below their $600,000 luxury threshold.
3. Fortune article on Greenwich, CT. The sales slowdown in high-profile Greenwich, CT, was featured in Fortune magazine. The article included some very misleading headlines about a national luxury slowdown that were supported only by the fact that prices have appreciated 5% at the high end compared to more appreciation at lower prices.
This is an odd interpretation of the Greenwich market. I track this market in my research, live near it and have relatives that live there. This Fortune article was not misleading. Prices have not appreciated 5% at the Greenwich high end and $600,000 might not even buy you a starter home there. In fact, their luxury market has still not recovered from housing bubble.
4. Increased $1 million new-home supply. New-home sales have slowed in a few new-home markets due to a surge in competitive supply. Coupling this surge in supply, builders have pushed prices too high in comparison to the resale competition due to rising costs.
Why is this perception wrong? Excess or rising luxury supply is apparent across the 28 markets I research.
5. Improving entry-level sales. Entry-level sales are also improving at a faster rate than higher-priced home sales. Indeed, the market for lower-priced homes is stronger, but that does not mean that luxury sales are struggling.
True, but I think the disconnect is just the opposite. The luxury market is soft so many market participants assume the entry level is soft as well and yet it is seeing heavy sales volume.
Since housing across the U.S. is softer at the top, Wall Street looks like they have been correct about luxury. Placing a uniform threshold across a slew of different U.S. housing markets doesn’t tell us anything. Stick to specifics since that’s where you provide solid research.
I have a lot of good friends and colleagues who frequently give at least a passing thought to quitting the Appraisal Institute, the largest real estate appraisal industry trade group. At the national level, the association has lost the ability to work for its members and has instead, shifted into a political failure spiral by enacting policies that are against their chapters’ and members’ best interests.
I get these types of comments from members at get togethers who say things like…
“I am only paying my dues to retain my designation.”
“The chapters are the only relevant thing AI provides to help me.”
“The self-dealing politics at National sickens me.”
Their announcement of the new administrative policy on November 30, 2016 continues the trend:
As you might have heard by now, the Appraisal Institute Board of Directors recently took a significant step to enhance your chapter’s ability to focus its attention on providing member services by reducing your current administrative burden. This is great news for chapters.
Here’s the letter that was sent to chapter leaders:
It reminds me of an old IRS joke: The IRS agent walks into your office with arms extended for a handshake and says:
“I’m from the IRS and I’m here to help you.”
It has been discouraging to watch the Appraisal Institute (National) erode into irrelevance while the appraisal industry is crying out for leadership at a seminal moment in our history. Dodd-Frank is about to be gutted and appraisal management companies have run out of appraisers willing to work for half pay. Instead they have morphed into a trade group that is unable to help its members. I challenge my readers to provide any evidence of such leadership since the financial crisis.
One of the only remaining redeeming features of the Appraisal Institute aside from their SRA and MAI designations has been the strength of local chapters. It’s where the rubber hits the road, where appraisers press the flesh at local meetings, take classes and listen and interact with guest speakers. The real value of AI membership remains at the chapter level.
At the Appraisal Institute headquarters in Chicago (National), they clearly recognize the power of the local chapters. For an organization that has been encumbered by procedural minutae, they developed the ability to enact policy without input or oversight. Here’s the current controversy over a non-vetted decree from National that involves money.
National has enacted a new policy that requires all money at the chapter level be administered by National. It’s a political power grab that will further alienate dues paying members. This is part of the growing pattern of AI’s lack of communication to their members.
The very large New York Metro chapter responded in a letter from their board 2 days later – about being blind sided by the new policy. It’s an incredible read – a full-on indictment of the thinking of National. So many great appraisers in that chapter but how long will they put up with this? You can see how hard the local chapter is holding back it’s anger for such a policy. See link for pdf or the full text below. Bold emphasis provided by me.
December 2, 2016
Dear Members of the Appraisal Institute Board of Directors:
This letter is being submitted on behalf of the Board of the Metropolitan New York Chapter of the Appraisal Institute as a response to the National Board’s recent decision to implement a new Appraisal Institute Chapter Financial Management and Administration Policy. The Metro New York Board met this week and unanimously agreed to communicate our disapproval of the new policy and our astonishment that such a major change could be effectuated without any sort of prior notification or consultation with the Chapters and the Membership. Furthermore, to announce this decision as a fait accompli late on a Friday before a holiday week is alarming to our Chapter’s Directors.
The Metro New York Board finds it surprising and unacceptable that such a significant policy change in the governance of Chapter finances could be constructed without any transparency, input or dialogue with the Chapters and Membership. Simply being informed that national will take over our Chapter funds, albeit with assurances of our continued control of our finances, is outrageous paired with the admission that “Adjustments may have to be made to the policy as implementation progresses.” By creating this plan, effectively behind closed doors, you have not instilled any sort of confidence that the policy you are demanding we accept is acceptable to the Chapter. Given that the Appraisal Institute has a model for gaining feedback from the Membership – with the 45-day notice model provided for other significant actions impacting Members and Chapters – the Metro New York Board feels it is not at all appropriate for the national Board of Directors to unilaterally create this new policy in such an opaque manner. Given the potentially serious impacts of this new policy on the individual Chapters, we believe a more extended, perhaps 90-day notice would be minimally appropriate particularly given that this change was basically “sprung on” the Chapters on the advent of the holiday season that creates extra demands on all of us.
Beyond our uneasiness with the lack of transparency and how this new policy was implemented, the Metro New York Board finds the policy itself to be unacceptable. We believe that turning over our funds to national would limit and impact the autonomy of our Chapter and potentially diminish our stature in the local real estate community. The Metro New York Chapter is one of the most active Chapters and has been diligent in providing necessary education opportunities for our members and candidates, organizing enriching events for our members and the broader New York City real estate community, and fostering a supportive framework to help candidates work towards their designations. Importantly, this last goal contributes to the health of the organization nationally. Many of these programs are supported by our members through a historically successful Chapter sponsorship program. We believe our success in these endeavors illustrates that we are proficient in managing our own funds, maintaining reserves, and knowing how to do what needs to be done on a local basis. Certainly stripping the Chapter of its funds, particularly under terms that may be subject to change, will undermine the Chapter membership’s confidence that our efforts to maintain the economic health of the Chapter constitute time well spent. Furthermore, several Chapter sponsors who have consistently supported Chapter endeavors have expressed concern about this change in policy and that it may impact their willingness to continue such sponsorships in the future considering the substantial loss of Chapter autonomy as a result of the new policy changes.
While we look forward to hearing more details regarding the new policy from National on Tuesday’s call, the Metropolitan New York Chapter Board strongly urges the National Board to reconsider implementing this new policy.
Appraisal Institute, New York Metro Chapter
John A. Katinos, MAI, President
On behalf of the Metro New York Chapter Board of Directors
I heard a rumor that AI wants to do away with chapters and I’ve also been told that is not true – but with the opaqueness of National, I don’t know what to believe. And I keep hearing rumors about AI spending millions to expand their footprint across the globe but haven’t seen any measurable success let alone share the status of this effort with members. Is esoteric global expansion worth raising dues in a compensation compressed environment? Is the membership even aware of this effort and the millions supposedly lost?
Most of my peers nationwide have expressed frustration with an organization mired in self-serving politics. And it only seems to be getting worse.
My moment of zen was their self inflicted and childish exit of the Appraisal Foundation a few years ago. I eventually left AI and moved on to two other organizations that provide what appraisers are looking for. Remember that most of us are “lone wolves” and belong to organizations to get other perspectives. I can’t tell you how many SRAs and MAIs I know are talking about leaving the organization.
And did you ever wonder why there are so many statewide appraisal coalitions popping up? It’s largely because of inaction by National or their opposition to issues important to appraisers.
Incidentally, this new policy parallels the changes made by the Chinese government a while back. They moved the majority of the tax income stream from the provinces to the national government. This forced the provinces to go hat in hand to the national government to beg for an allotment of income each year. Sound familiar?
Lots of graft ensued for the provinces to get their “share” of revenue. In fact one of the reasons there are as many as 40 ghost cities in China right now is because the provinces were incentivized to generate GDP. What better way to do that then to build cities for several hundred thousand residents that would never come.
The moral of the story: central planning is never efficient. Through the loophole that National installed allowing them to modify this policy at anytime in the future is a recipe for disastrous self-dealing.
This is the appraisal industry’s moment to have some impact on our future. There are many challenges in front of us. The Appraisal Institute on a national level is now officially obsolete.
Enough with the self-dealing. We don’t make enough money collectively to fund their boondoggle. We need leadership, not politics.
S&P CoreLogic used it’s National Non-Seasonally Adjusted Housing Price Index to declare that the housing market has recovered. Even the ironies of this public relations effort have ironies. I’ll explain.
First, look at this classic Case-Shiller chart. Notice how the arrows don’t connect to the lines they are associated? I’m being petty but it looks like the chart was updated and rushed out the door.
Incidentally, who controls the Case-Shiller Indices brand these days? It used to be “S&P/Case-Shiller Indices.” Here are a couple of variations found in the first paragraph of the press release:
but I digress
Since the financial crisis, I have spent a good deal of time explaining away the reliability of the Case Shiller Index.
To be clear, I greatly admire Robert Shiller, the Nobel Laureate and his pioneering work in economics. I’ve had the pleasure of speaking with him on a number of occasions both publicly and privately. He and I were on stage together at Lincoln Center back during the housing bubble for a Real Deal event.
During the bubble I was the public face of a short lived Wall Street start-up that collapsed when the bubble burst. Like Case-Shiller it was built to enable the hedging of the housing market to mitigate risk using a different methodology, avoiding the repeat-sales method used in CS. The firm had annoyed Shiller by constantly citing the issues with the CS index and we got far more traction from Wall Street with our index that was (literally) built by rocket scientists. It got to the point where he mentioned me and the startup by name at a conference in frustration.
After I disconnected with the startup before it imploded, I reached out and we made up. In fact he did my Housing Helix podcast (link broken but hope to bring it back online soon for historical reference) at my office back when I was doing a podcast series of interviews with key people in housing). Also we’ve run into each other on the street in Manhattan a number of times. In fact when he learned of my love of sea kayaking he gave me the latitude and longitude coordinates of his island vacation home in case I was nearby. You can see that I feel a little guilty criticizing the use of the index since he is one of the nicest and smartest people I’ve ever had the honor to meet.
But I don’t like the way S&P, Dow Jones and/or CoreLogic have positioned Case-Shiller as a consumer benchmark. And especially yesterday’s announcement as a marker for the recovery of the U.S. housing market. I feel this is a low brow attempt by these institutions to leverage publicity without much thought applied to what is actually being said. Here are some thoughts on why it is inappropriate to use this moment as a marker for the housing recovery.
“The new peak set by the S&P Case-Shiller CoreLogic National Index will be seen as marking a shift from the housing recovery to the hoped-for start of a new advance” says David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices.
Blitzer remains in the very awkward position of explain away the gap between the market 6 months ago and current condition as if there is no difference. He does this by using anecdotal commentary about metrics like supply that has nothing to do with the price index as well as making pithy remarks.
The Case-Shiller National Index is being touted for reaching the record set in the housing bubble a decade ago despite the record being set back then by artificial aka systemic mortgage fraud. However their 20 city index has been pushed as the key housing benchmark for more than a decade, not the national index. And they are using the non-seasonally adjusted national index to proclaim the record beaten despite their long time preference of presenting seasonally adjusted indices (the seasonally adjusted national index has not broken the housing bubble record yet).
The credit bubble got us to the 2006 peak, not anything fundamental.
In my thirty years of valuation experience, I have learned that sales transactions, not prices, should be the benchmark for a housing market’s health.
The 0% markets that reached the 2006 peak are super frothy – created by rapidly expanding economies and an inelastic housing supply. Income growth doesn’t always justify their price growth. Click on table below for the markets shaded in turquoise.
Some important background points on the Case Shiller Home Price Index (CS) – that most of its users are unaware of:
CS was never intended for consumer use! It was built for Wall Street to trade derivatives to hedge housing market risk much like hedging risk for weather, insurance, non-fat dry milk and cheddar cheese.
CS never caught on because housing is a slow and lumbering asset class, unlike a stock which has much more liquidity. The flaw during this bubble period was the way Wall Street and most real estate market participants considered housing as liquid as a stock and how financial engineering had enabled that liquidity.
As access to public housing data has become more ubiquitous, the index has been more easily gamed by companies like Zillow, who have been able to accurately predict the index results much sooner rendering the index as useless for hedging.
CS lags the actual “meeting of the minds” between by buyers and sellers – when they agree on the price and general terms – by 5-7 months. The November report just released was based on the 3 month moving average of closed sales from July, August and September. If we say that contract to close period is an average of 60 days, then the contracts signed in this batch of data represent May, June and July. And the time between the “meeting of the minds” and the signed contracts can be a couple of weeks, so the results in yesterday’s lease of the Case-Shiller index represents the period around Memorial Day weekend as summer was getting started.
CS only represents single family homes (although they have an index for condos).
CS excludes new development.
There is little if any seasonality in the CS methodology (even though there is a seasonally adjusted version).
Geographic areas in the 10 and 20 city CS indices are incredibly broad. For example, the “New York” index includes New York City, Long Island, Hamptons, Fairfield County, Westchester County, a bunch of counties in northern NJ and a county in Pennsylvania. Yet this index is often represented as a proxy for the Manhattan housing market by national news outlets. Manhattan residential sales have about a 1% market share of single family homes.
In other words, the CS index is a great academic tool to trend single family home prices at a 30,000 foot view for research but not to measure the current state of your local market.
I just returned from China for the second time in a little over a year and have yet been able to make sense of their domestic housing market. I am not talking about their must discussed housing bubble phenomenon or whether they have a housing bubble in the truest sense. I am talking about what seems to be a lack of a re-sale market.
After years of communist rule, the concept of home ownership in China is relatively new and appears to be in its early stages of development. Because growth in housing construction has been astronomical with all sorts of distorted metrics – their use of cement in 3 years (2011-2013) was more than the amount used in the U.S. over 100 years (1901-2000).
Housing accounted for at least 15% of GDP in 2015, down from 22% in 2013. This is why we are seeing large Chinese construction companies working all over the globe these days – due to oversupply of new housing in China. The opportunities for revenue growth at the same pace seems limited.
On the bullet train we rode from Bejing to Shanghai, there were high rises under construction on both sides of the train tracks for most of the 5.5 hour trip. It’s hard to comprehend how much construction is underway without seeing it first hand, but it is massive.
Ghost Cities v. Ghost Towns
Unlike ghost towns in the U.S. which are abandoned after the economic forces are no longer in play, ghost cities have never been occupied. I think this is a pretty obvious flaw of central planning. I learned that incentives play a big role in unnecessary construction. In order for provinces to receive income from the central state, they are encouraged to generate GDP. Construction of apartment buildings is a quick way to boost GDP but there didn’t seem to be concern about their eventual occupancy (a la, build it and they will come). Also since the government owns the land, developers pay ongoing fees for using it. Our tour guide said that there were at least 40 ghost cities in China although this study says there are less. Here is a map of known ghost cities:
Multiple generations pooling their equity
Housing prices have been rising at about 17% annually for a decade – versus 11% disposable income growth of city dwellers. Rising prices have forced many buyers to pool the financial resources of as many as 3 generations of family. This shows how much is at stake for the Chinese government – if the housing bubble was to collapse. Yet same people I spoke with that expressed faith in the housing market showed grave concern over the integrity of their stock market. What alternative investments aside from housing does the typical domestic investor have? Especially since Chinese housing prices increased 53% in the past year?
However I am trying to get an answer for a much more basic point.
Is there a substantial Chinese re-sale market?
I feel way out on a limb when I say the following: few investors actually sell their apartments in the newly constructed apartment buildings.
I asked investors and real estate professionals in the Chinese housing market; four of our tour guides of the past few years; various people I met there during The Real Deal Shanghai conference: “Do investors sell their new apartments?” I consistently got a blank stare for a few moments as if the question had never come up before. A few people told me that buyers hold on to their investments for the long term and “no one sells.” On one of the real estate panels I moderated in Shanghai, a real estate professional made a comment that Chinese investors always prefer new.
The government has been trying to cool the market, requiring much larger down payments for investors, i.e. 70% and limit purchases to 1 per investor, but demand and creative work arounds, such as bogus divorces to skirt restrictions, remains high.
U.S. re-sales (existing sales) have accounted for roughly 85% of total U.S. housing sales over the long run. Granted, China is new to the concept of home ownership so the re-sale market would not dominate housing sales like it does in the U.S. But without a vibrant re-sale market, the “value” derived from Chinese housing market indices tell us Chinese housing price trends must be almost exclusively based on the newest home construction sales prices and that equity is not tangible.
Home sales seem to be a one-way transaction. Investors that buy a home feel wealthier as their investment rises in value. Theoretically that gets them to go out and consume, i.e. the wealth effect. However the market share of consumer spending in China is roughly half the 60% market share seen in the U.S. so they have a long way to go. While the Chinese investor may enjoy rental income when an active rental market exists, domestic housing purchases seem to be driven by a long term equity play.
I have found no anecdotal evidence of the widespread selling of existing properties that were recently developed. There doesn’t seemed to be a tangible moment when the recent investor expects to cash out the equity realized on their purchase of several years ago. If this is an incorrect observation and there indeed is a vibrant and active re-sale market of newly constructed housing, I was unable to see one or be told of one by consumers and real estate investors who live there.
So please clue me in.
The YIMBY (Yes-In-My-Backyard) movement is fairly new.
In the United States, early leaders of the YIMBY movement include Sonja Trauss in San Francisco and Nikolai Fedak in New York. The first ever Yes In My Backyard conference was held in Boulder, Colorado, in June 2016.
Nikolai has done an amazing job at chronicling the explosion of new development in NYC over the past several years with his must read web site New York YIMBY.
One of the misconceptions with the NIMBY movement which is largely the opposite of YIMBY is the idea/rule of thumb that low-income housing always drags down property values of nearby properties. In an era challenged by the lack of any type of affordable housing, this makes a bad situation worse.
According to this recent research by Trulia (FYI – I was part of their industry advisory board from 2006-2014), and notably in aggregate form, the impact seems to be non-existent in the majority of the markets covered. One can’t conclude there is no impact as a general rule but it does show that should not be the default assumption.
The above infographic is from this Weekend’s New York Times’ real estate section column called ‘Calculator’ – Low-Income Housing: Why Not in My Neighborhood?. The methodology used in the Trulia research was the following:
To measure this, Trulia compared the median price per square foot of nearby homes (within 2,000 feet of low-income housing) with that of homes farther away (2,001 to 4,000 feet) over 20 years, starting 10 years before the low-income housing was built and ending 10 years after.