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Boom Bubble Bust

Greenwich CT Pre-Lehman “Reno, Then Flip” Mentality Is Long Gone

February 26, 2016 | 9:41 am | delogo | Charts |

Fairfield County, CT is one of the more recent editions to our Elliman Report series. Greenwich, CT as a submarket has proven to be a market still strongly linked to the heady days before the collapse of Lehman Brothers in 2008 and the beginning of the financial crisis. There remain many owners of high end homes purchased a decade ago that remain value-anchored to those days of yore.

I took a look at the last 15 years of residential sales, measuring the amount of time that passed from a home’s prior renovation to sale. From the late 1990s to Lehman, there was a compression of time from renovation to eventual sale, reflective of the speculative conditions leading up to Lehman. Reno a home, then sell it. During those days, business cards passed out by doctors and lawyers at Greenwich cocktail parties were either “hedge fund manager” or “developer.” Not so much anymore.

Subsequent to Lehman, the late 1990s pattern that preceded the U.S. housing bubble returned by 2010 and has remained remarkably stable since.

4Q15GR-sincelastreno

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Contrarians React to Quicken Loans Rocket Mortgage Outrage

February 16, 2016 | 2:30 pm | Favorites |

During the Super Bowl advertising blitz, the most controversial advertisement seemed to be (no, not Mountain Dew’s PuppyMonkeyBaby) Quicken Loans RocketMortgage Super Bowl Ad: What We Were Thinking

David Stevens, CEO of the Mortgage Bankers Association was annoyed at the public outrage.

Even the Urban Institute’s Laurie Goodman who is another voice of reason, writes a blog post on Why Rocket Mortgage won’t start another housing crisis.

I am one of those who were angry after seeing the QL commercials that aired before the Super Bowl and my disbelief continued after watching the Super Bowl ad. I lived the insanity and the QL commercial was completely tone deaf and gave me great concern about repeating mistakes in the past. In fact I was so concerned that I made the QL Super Bowl commercial the cornerstone of last week’s Housing Note: Rockets Engineered to Amaze Housing: What was Quicken Loans Thinking?

A week later my view on the ad hasn’t changed and in all due respect to Laurie and David, I think they missed the forest for the trees (there’s a digital v. paper pun somewhere). I’ll explain by going through their own points:

  • Borrowers can give lenders easier access to bank information – this is one of those wiz bang promises we always see with new technology (assuming this product is new technology). But I don’t think anyone is arguing to keep the process arduous.
  • Approvals might be less prone to human error. – Sure, that’s entirely possible although this argument is like saying if there was less air pollution we might all feel better. We would have to assume that borrower data entry is better and it matches up to official documents like tax returns and pay stubs – something that was not a lender concern in the last cycle.
  • Automation may ease tight credit. That’s another one of those wiz bang assumptions that any technology gain – automation is better – remove humans and the process gets easier (again, we don’t understand what the details are of this wiz bang new technology). EZ Pass scanning technology on the highway is far better for toll collecting but it took a few decades to perfect. The mortgage lending process is full of judgments that need to be made and common sense has been removed from the mortgage underwriting process so it can be completed with checkboxes. I contend that automation will NOT ease credit any time soon because automation means a series of lending rules and it will take years to iron out. It may even delay credit normalization as lenders are reluctant to fully trust it. Plus lending continues to remain tight because of bad decisions made in the past and a weak outlook for the future (30 year fixed is below the level just before the December Fed rate hike), not because the process needs to be more efficient. Mortgage origination volume has fallen nearly every year since 2006 so I can’t see lack of automation as holding back the normalization of credit.
  • Digital lending is here to stay. No one is really arguing against digital lending per se. The future across most industries is digital and that transition can be good and bad. The mortgage process is much more digitized than it was a decade ago so disagreeing with the Rocket Mortgage message doesn’t make someone anti-digital.
  • Make a complex process easier for qualified buyers. Of course! If that is what is actually being delivered. It’s a black box and the consumer is getting their information from a commercial that conveys dated message. If David gave a speech in a 1970s era polyester suit with bellbottoms, would his current information leave the audience with a current market impression?

The real reason for the pushback on this rocket thing is not because we are anti-digital, anti-efficiency, anti-credit easing, anti-automation or anti-polyester bellbottoms. The pushback comes from the messenger being the second largest mortgage lender in the U.S. who marketed their product seemingly devoid of any understanding of the housing bubble, which after all, was really a credit bubble.

And it becomes even more clear to me as an appraiser, looking at their complete reliance on appraisal management companies and how awfully unreliable that post-financial crisis industry really is at estimating collateral, that their judgment is flawed in the long run.

The same sort of promises and expectations were made during the run up of Countrywide Mortgage. We are nearly 9 years down the road from the 2007 implosion of American Home Mortgage and those 2 Bear Stearns mortgage hedge funds and yet economically, the world is still in the hangover stage.

I don’t really believe that QL’s Rocket Mortgage product will bring down the world’s economy as we saw with financial engineering in the last cycle. But it is a concern and unbelievable that this was the messaging they chose to go with. As Mark Twain said (paraphrased) “History doesn’t repeat itself but sometimes it rhymes.”

Please watch that commercial again.

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Charts That Don’t Make Real Estate Trends Into A Stock Ticker

December 21, 2015 | 12:10 pm | bloomberg_news_logo | Charts |

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If you’re a subscriber to the Bloomberg Terminals, as roughly 350,000 people are (paying $1,600+ per terminal per month), then you may already know there are a half dozen charts on the Manhattan luxury housing market. To be clear, these indices don’t suggest that housing price trends should be presented as a stock ticker.

It’s a good thing too, since the thought of making real estate housing markets equate to stocks was inspired by, and then was crushed by, the housing boom-bubble-bust era 2003-2008.

Here’s why a stock ticker for real estate is a flawed (aka dumb) concept:

  • A stock market moves in the context of nanoseconds rather than weeks or months.
  • Contract data is not available market-wide and if it were, lags the market by several weeks.
  • Closed data used in a ticker would lag the market by months.
  • It implies instant liquidity for real estate holdings.
  • Not all property types see high volume so their trends are extrapolated (and thus diluted).
  • It teaches market participants that short term views on real estate holdings are the norm, the way a stock day trader views the market.

While a daily real estate index can be created with relative technical ease, it doesn’t mean it is a good idea. It infers a level of precision that doesn’t exist and an accuracy based on lagging data that is not understood by users.

Those who push the stock ticker idea either didn’t work through the last cycle in real estate, or they didn’t learn from the experience.

We update 3 charts on the Manhattan luxury sales market and 3 for the Manhattan luxury rental market. I have always defined “luxury” as the top 10% of transactions during a period.

Click on the gallery below to open each of the indices.

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The Big Short: The Movie Coming this December

September 23, 2015 | 11:37 am |

Coming to a theatre near you in December…

Aside from playing my favorite Led Zeppelin song “When the Levee Breaks” and being based on one of my favorite books about the housing bust/financial crisis “The Big Short” that was written by one of my favorite authors Michael Lewis (Blind Side, Flash Boys, Moneyball, Liar’s Poker, The New New Thing, etc.) that includes pretty much all my favorite actors – it’s a freakin’ incredible story.

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Bloomberg View Column: Real-Estate Appraisals Are Bubbly Again

December 26, 2014 | 2:13 pm | BloombergViewlogoGray | Charts |

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Read my latest Bloomberg View column Real-Estate Appraisals Are Bubbly Again. Please join the conversation over at Bloomberg View. Here’s an excerpt…

A key goal of the financial reforms after the housing bust was to prevent banks and other interested parties from pressuring real-estate appraisers to inflate valuations…

[read more]

This particular column blew up the Bloomberg Terminals, becoming the number 1 most read real estate article and the 15th most read of all articles on Bloomberg Worldwide.

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Economic Bubble Theory Using Bubbles

December 22, 2014 | 12:03 pm | TV, Videos |

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[click on image to play video]

Ok, so I like making bubbles. Here’s a reason (or excuse) to watch some bubbles – tie it in with economic theory.

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Bloomberg View Column: Housing’s Misleading Health Indicator

November 30, 2014 | 11:00 am | BloombergViewlogoGray | Charts |

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Read my latest Bloomberg View column Housing’s Misleading Health Indicator. Please join the conversation over at Bloomberg View. Here’s an excerpt…

The National Association of Realtors will release its monthly U.S. existing home sales report tomorrow. Among other things, the report includes what’s known as the absorption rate, or how many months it would take to sell all inventory at the current sales pace. This report and the media coverage around it will inevitably provide the well-worn insight that when the rate is less than six months, housing is “healthy”…

[read more]


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Bloomberg View Column: Housing Bust Wasn’t About the House

November 30, 2014 | 9:00 am | BloombergViewlogoGray | Charts |

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Read my latest Bloomberg View column Housing Bust Wasn’t About the House. Please join the conversation over at Bloomberg View. Here’s an excerpt…

Unless you live in a cave, you’re no doubt familiar with the outlines of the housing bust that marked the beginning of the financial crisis: Real-estate prices plunged, people lost their homes, banks went under and the economy tumbled into a recession. We are still grappling with the hangover…

[read more]


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Bloomberg View Column: Credit Crunch Lives on in Housing

October 22, 2014 | 5:05 pm | BloombergViewlogoGray | Charts |

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Read my latest Bloomberg View column Credit Crunch Lives on in Housing. Please join the conversation over at Bloomberg View. Here’s an excerpt…

Don’t be fooled by low mortgages rates, which once again are below 4 percent: Credit for buying a home or refinancing an existing mortgage has almost never been tougher to get.

[read more]


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Housing is a Drag: US Student Debt Bubble Made Worse by the Baby Boomer Nanny State

June 16, 2014 | 1:55 pm | fedny2 |

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[click to open report]

I like to say that we never had a housing bubble in the US. It was a credit bubble with a housing as a symptom. The same credit bubble logic applies to college costs which have run unchecked well past the housing bubble “pop” in 2006 and the great recession.  Lately there has been discussion on the student debt crisis by economists and financial journalists that the phenomenon is overhyped – which prompted this post as a college tuition paying parent.

College costs for a 4 year degree are growing at a rate of about 5%, well above inflation. Access to credit has remained easy for students and parents to obtain so there are no real checks and balances (no pun intended) on college costs. Demand is high as students and their parents often fight to gain admission and can worry about paying off the debt later.

It’s been widely discussed that anemic household formation is holding back the housing market and the economy from fully recovering, that student debt has been the key culprit in holding back young people from striking out on their own, resigned to live at home until their finances get better. Speaking as a parent who just finished sending a son through college with more on the way, it’s a hard reality for parents too.

I was standing on the platform the other day waiting for a delayed commuter train (hey, it’s Metro North, who else) and struck up a conversation with a woman who was lamenting about all the debt she and her husband incurred sending their 4 kids to Ivy League schools – only for them to be unable to find a job in their chosen profession or find one that pays a living wage – these factors are often mutually exclusive.

Parents that borrow heavily to finance their children’s education is the sort of thing that is missed in economic data because that debt is in some other form of a home equity loan or other debt.

“Parents are facing an economic crisis because they are borrowing too much for college,” says Rick Darvis, executive director of the National Institute of Certified College Planners. “They’re sacrificing their current lifestyle and robbing their future retirement.” The rising levels of parental debt could ripple through the rest of the economy. By the time parents are in their 50s and 60s, they should be saving for retirement instead of taking on new liabilities, says Joseph S. Messinger, a certified college planner and president of Capstone Wealth Partners in Columbus, Ohio.

We are seeing financial coping strategies emerge like going to a community college for 2 years to save money and transferring to a better school for the remainder – or questioning the value of college all together. The cost/benefit of a college degree is being called into question because of the combination of spiraling costs and tepid job opportunities for many in the current economy.

The baby boomers have taken on significant debt to finance their children’s education. Sure the average student debt is $25k to $29K, the cost of a new or used car, but I contend a large portion of college debt is in the shadows born by the parents.

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The average cost for a 4-year degree is about $23K (blended cost of private and public) which suggests that the debt would only cover about 80% of the cost of first year. This would imply that more than 3/4 of the cost of a 4-year degree was paid in cash through savings and working during the four year period. That doesn’t seem plausible to me – actually it seems ludicrous. Parents have to be paying  cash or taking on an inordinate amount of debt to pay for the other 75% of the cost that doesn’t show up in the school related debt numbers.  How common is it to see parents in our helicopter nanny state shoulder little to no financial burden for their children’s college educations? No matter the demographics, I contend it’s quite rare.

And how does this impact the US housing market recovery?

  • Household formation is weak as young adults with high debt, limited job opportunities or both, live with their parents after graduating – for extended periods of time, delaying their entrance into the housing market.
  • Parent’s are burdened by taking on debt for children’s college education, can’t trade up, make a lateral move, or downsize because they can’t qualify for a mortgage to buy a house (and keeps inventory off the market as well, making prices rise).

The tepid economy has exposed the problem – and the heavy debt loads could provide a drag on housing for an extended period of time.

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Spectacular TED Talk on The US Financial Crisis: How it Happened + How to Prevent

May 31, 2014 | 4:59 pm | Favorites |

Wlliam Black, a former bank regulator, made a TED Talk last fall that I wish I had made (but I couldn’t be as eloquent although I have a cooler tie). It should be required viewing by anyone who is connected with the housing industry.

Black’s presentation lays out the financial crisis in the proper context. He provides the recipe for disaster for all to see and it is NOT complicated to understand. Change the perverse incentives and a lot of this goes away. So many opportunities to avoid this crisis were missed.

And this is the first time I’ve heard someone talk about the unrelenting pressure that banks (and mortgage brokers) placed on appraisers, essentially forcing our industry to either make the number of get out of town. By 2007, 90% of appraisers said they were coerced by banks to make the number. That seems low to me. It had to be 100% or else those 10% of appraisers were living in a cave.

I’ll be returning to this video periodically for the foreseeable future as a reminder.

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We’re at “Peak Anti-Homeownership”

May 21, 2014 | 11:00 am |

Joe Weisenthal, Executive Editor of Business Insider, pronounced we’re at “Peak Anti-Homeownership” after reading Barry Ritholtz’ Bloomberg View piece on homeownership a few weeks ago.

If financial journalists and housing pundits today truly reflect the US sentiment about housing and homeownership, then we’re clearly manic about our largest asset class.

The conversation by a number of financial journalists and a particular Nobel Prize winning economist has morphed into a homeownership-is-a-false-aspiration pronouncement, almost entirely supported by treating this asset class as a stock. Didn’t we learn the hard way that this was flawed thinking during the prior boom? And unless I’m mistaken, the majority of US homebuyers, aside from investors, used leverage for much of the last 50 years. How about we estimate the ROI on what real people actually do and stop thinking about homeownership as a stock transaction? Good grief.

2012-2013 – Last year’s housing market “recovery” pronouncement was based on nothing fundamental, merely Fed policy of QE and years of pent-up demand released after the “fiscal cliff” came and went without a major catastrophe. Pundits caught up in the price euphoria said the housing market was firing on all cylinders. Yet surging price growth was largely based on sales mix-shifting, less distressed sale buying, tight credit causing, lack of inventory inducing, fear of rate rising, double-digit price growth. Positive housing news was refreshing news to many, but there was nothing fundamental driving the market’s performance to such incredible rates of growth. I couldn’t wrap my arms around 13% price growth with tight credit, stagnant income growth and unacceptably high under-unemployment as economic fundamentals.

2014 – This year’s housing market, which is being compared to the year ago frenzy, is showing weaker results. The housing recovery “stall” is being blamed on the weather, falling affordability and weaker first time buyer activity. This has brought some in the financial media to conclude that homeownership is over rated.

An aside about the weather – a homebuyer last January didn’t say “Gee, since it is 0 degrees outside, let’s cancel our appointment with the real estate agent and delay our home buying plans for 5 years.” Of course not – the harsh weather merely delayed the market for a month or two. However since it hasn’t “sprung back” yet, then clearly there is something else going on besides the weather.

Falling homeownership and anemic household formation is the result of a lackluster economy and a global credit crisis hangover. I can’t make the connection how these weaker metrics have anything to do with a flaw in the homeownership aspiration. Homeownership is falling because it rose to artificial highs (Fannie Mae was shooting for 75% during the housing boom) and is now overcorrecting because credit is unusually tight, the byproduct of a lackluster economy, the legacy of terrible lending decisions and fear over additional forced buybacks of flawed mortgages among other reasons.

I’m quite confident that a significant, sustained economic recovery will go a long way to ease credit conditions and eventually revert homeownership to the mean and we can stop with the “cart before the horse” orientation. While homeownership has never been right for everyone, recent calls that it’s not right for anybody is just as flawed.

Then we’ll pronounce “Peak-Homeownership” in our own manic way.

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