Bloomberg View’s “Bubble to Bust to Recovery.”
I’ve long been a critic of my own industry. Like any industry there are terrific appraisers, average appraisers and form-fillers. Post-Lehman there are a LOT more of the latter.
The scenario that prompted these articles and others like them occurs when a sale is properly vetted in the market place and an appraiser enters the transaction and subsequently appraises the property below the sales price. It supposedly is happening in greater frequency now, hence the rise in complaints.
My focus of criticism has largely been centered on appraisal management companies (AMC), who have tried to convert our industry to a commodity like a flood certification or title search rather than a professional service. AMCs serve as a middleman between the bank and an appraiser and they have thrived as a result of financial reform. Most only require an appraiser to be licensed, agree to work for 50 cents on the dollar and turn work around in one fifth the time required for reasonable due diligence. Appraisal quality of bank appraisals has plummeted in this credit crunch era and as a result has prompted growing outrage from all parties in a transaction.
Of course, the market value of the property may not be worth it. But the real estate industry doesn’t trust the appraiser anymore so we point them finger at them automatically.
Yes, it’s a hassle. So let’s decide what the problem really is and fix it.
A long time appraisal colleague and friend of mine once told me before the housing bubble burst:
“Jonathan, you as the appraiser are the last one to walk into the sales transaction. Everyone involved in the sale is smarter than you. The selling agent (paid a commission), the buyers agent (paid a commission), the buyer (emotionally bias), the seller (emotionally bias), the selling attorney (paid a transaction fee), the buyer’s attorney (paid a transaction fee) and the loan officer or mortgage broker (paid a transaction fee) all know more than you do.”
The appraiser in this post-financial reform world doesn’t have a vested interest in the transaction like they did during the housing boom – some could argue they are too detached. The vested interest I speak of occurred during the bubble when mortgage brokers and most banks generally used appraisers who always “made the number.” Incidentally, many of those types of appraisal firms are out of business now.
Let’s clear something up. The interaction an appraiser has with a lender when appraising below the purchase price now is not that much different than during the boom. When an appraiser kills a sale, the appraiser is generally hit with a laundry list of data to review and comments to respond to questions from the AMC, bank or mortgage broker who use the “guilty until proven innocent” approach even though the bank likely won’t rescind the appraisal. The additional time spent by the appraiser is a significant motivator to push the value higher to avoid the hassle if the appraiser happens to be “morally flexible.”
And by the way, sales price does not equal market value.
The sources for most of these low appraisal stories I began this post with come from biased parties so it makes it clear that low appraisals are the problem. In reality, the low appraisal issue is merely the symptom of a broken mortgage lending process. The problem is real and becomes more apparent when a market changes rapidly as it is now. Decimate the quality of valuation experts and you generate results that are less consistent with actual market conditions and therefore more sales are killed than usual. Amazingly the US mortgage lending infrastructure today does not emphasize “local market knowledge” in the appraisers they hire no matter what corporate line you are being fed. This is even more amazing when you consider that most national lenders have only a handful of appraisal staff and tens of thousands of appraisals ordered ever month.
The cynical side of me thinks that rise in low value complaints reflects an over-heated housing market – that the parties are getting swept up in the froth and the neutral appraiser is the voice of reason. The experienced me realizes that financial reform has brought new appraisers into the profession that have no business being here (and pushed many of the good ones out) and that the rise in the frequency of low appraisals has only seen the light of day because housing markets are currently changing rapidly.
Here’s my problem with the mortgage lending industry today as it relates to appraisers:
• Most of the people running bank mortgage functions are the same as during the bubble, only see appraisal as a cost, not as eyes and ears.
• Banks love the current state of appraisals because the values are biased low (banks are risk averse) and they fully control the appraiser.
• Appraisal Management Companies themselves have no real oversight (some are very good, most are terrible).
• Banks no longer emphasize local market knowledge in their appraisers or they pay lip service to it.
• Short term cost savings trumps emphasis on quality and reliability.
Every now and then (like now) everyone seems surprised and feels hassled when appraisal values don’t match market conditions. However the bank appraisal process has largely morphed into an army of robots on an assembly line – either because we are unaware of the problem until it affects us directly or we just want it that way.
Let’s focus on fixing the mortgage lending process or stop complaining about your appraisal.
This morning I noticed a quote I had made in an earlier piece this week was one of two quotes selected for “The Chatter” on page 2 of the NYT SundayBusiness section.
“No supply means frenzy, and it means prices rise.”
Forgive this exercise in narcissism but I learned a few things from the process.
Today’s quote mention gave me pause and since I’m midway through our quarterly market report gauntlet I thought I’d take a quick moment to comment on the thrill I experienced this past Tuesday contributing to Liz Harris’ cover story on housing market inventory (lack thereof). It was titled Words to Start a Stampede: New York Apartment for Sale. Liz writes an excellent weekly column with clearly the best title in all of journalism: The Appraisal.
On Tuesday (7/2) I was initially contacted for the piece, beginning a weeklong period of handwringing. At that time I was told it would run on Saturday’s cover (7/6) which seemed like a long time away. However the topic is evergreen (not time sensitive to the day) so it was likely “on the bubble” (pun sort of intended) if any last minute breaking news appeared.
On Friday afternoon (7/5) I learned that Saturday was pushed to Sunday to make room for the crisis in Egypt.
Late Saturday (7/6) evening I learned that Sunday was pushed to Monday to make room for the plane crash at SFO airport.
Late Sunday (7/7) evening I was told that Monday was pulled because former NY governor Eliot Spitzer announced his candidacy for NYC Comptroller and no word on whether it would appear in Tuesday’s edition.
On Monday (7/8) I was clearly hoping for a slow news day so the piece wouldn’t get bumped a fourth time so every news alert required my attention. By the time Monday afternoon rolled around, the article suddenly appeared online so I became confident it would never make the cover – but no page number was assigned to a print page.
The online article appeared on the NYT “Most Popular” page, reaching 13th place quickly soon after it was posted and rapidly ascended to number 4, finally surpassing the very popular article about stool.
I assume this was a way for the NYT to test via crowd sourcing how relevant this story was to deserve a spot on page one. The online article jumped to 2nd place, then 1st on the most emailed list so I began to feel confident that this was the feedback the editors needed. …and we were still ahead of the stool article.
Late on Monday evening the online article was appended by the following notation at the bottom of the page:
“A version of this article appeared in print on July 9, 2013, on page A1 of the New York edition with the headline: Words to Start a Stampede: New York Apartment for Sale.”
On Tuesday morning (7/9) my parents texted me at 6:08am to say they saw the printed version in their town drug store. The article actually made both the NY Metro edition and the US edition so I could share the fun with my relatives outside the NYC area, where social norms are a lot less obsessive about real estate.
Ok, back to work.
The word “bubble” is returning to the real estate conversation. Here’s a BBC clip on the rapid rebound in the Brooklyn housing market.
This documentary is compelling and so are all the cast members. It includes a who’s who list of current and past members of the Federal Reserve as well as economists and Wall Street experts. Cast members include my friend Barry Ritholtz and Gary Shilling who both have been on my podcast. Todd Harrison of the great site Minyanville.com and John Mauldlin who I have always looked to for insights. Jim Grant of Grant’s Interest Rate Observer who called me at the height of the crisis to get a gauge on the Manhattan housing market.
During the housing bubble I often felt like screaming as I saw the financial world through my appraisal glasses thinking I missed an important math class in 8th grade. Fast growing banks with gigantic mortgage volume and many of my appraisal competitors in bed with mortgage brokers were clearly smarter than me – they could make the numbers work and I couldn’t.
In 2003 and 2004 I remember being absolutely confident as a non-economist that the Fed was keeping interest rates too low for too long. I could see it in the loss of lending standards and the lavish incomes enjoyed by those around me who embraced a world of based on moral flexibility. The froth was simply ignored.
Don’t mean to get sentimental on you dear readers, but this movie struck a chord with me. Enjoy the trailer and watch for the release date announcement.
As the credit world was unraveling around them, email communications between analysts at S&P seems to be pretty damming to their neutrality position. And finally now the lawsuit. There’s a fascinating re-write of the great Talking Heads song “Burning Down The House” by an S&P analyst.
Here is the S&P email with the revised lyrics – as the credit world was imploding…
“With apologies to David Byrne…here’s my version of “Burning Down the House”
Housing market went softer
Strong market is now much weaker
Subprime is boi-ling o-ver
Bringing down the house
CDO biz — has a bother
Leveraged CDOs they were after
Going — all the way down, with
Hey you need a downgrade now
Huge delinquencies hit it now
Bringing down the house.”
Wow. Their other songs like “Wild Wild Life”, “Road to Nowhere”, and “Psycho Killer” might have also done the trick.
Once a month a local real estate broker passes out monthly updates of our local Connecticut housing market at our commuter train station. He’s a nice affable guy and I get to hear him explain the market to people as we wait in the warm station. He said this to me after I took a look at his handout this morning,
“The statistics aren’t too shabby, eh?”
And I smiled and responded, “that’s the power of record low mortgage rates.” to which he gave me the “thumb’s up” gesture.
And he’s right, his MLS statistics show a very much improved housing market from a few years ago and nearly all of the improvement has been mortgage rate related.
His view of housing is not unlike most public economic prognosticators from Wall Street, NAR, NAHB and real estate brokerage firms, consumers and general in-the-media-all-the-time types.
However few, if any, prognosticators understand why or seem interested in understanding whether it is sustainable (aka forecasting a trend). Once a metric shows promise, it will rise forever, or something like that.
Here’s my town recap for November being presented as a report (with a wildly low 15 sale data set). All the percentages reflect November 2012 over November 2011:
Despite the low data set, the results are remarkably consistent with national trends. Now look at why these metrics actually changed:
If you pull the plug on low rates, the housing market (literally) plunges. No one is suggesting this is the scenario that will occur but the national housing market feels incredibly fragile to me.
But why should I (or anyone else) actually care whether we understand what’s actually going on? The stats show sales and price numbers are higher than last year – “bullet dodged” – that’s all we need to know – we did the math.
I really enjoyed this “Charlie Rose”-like interview by late night TV host Conan O’Brien and statistician Nate Silver on his “Serious Jibber-Jabber” series. I recently bought Nate’s book “The Signal and the Noise: Why Most Predictions Fail but Some Don’t” and it’s next on my reading list (actually I bought 2 copies because I forgot I had pre-ordered on Amazon for Kindle and ordered again from Apple iBooks, Doh!).
What I found intriguing about the discussion is how much effort it takes to filter out the noise and get the to meat of the issue as well as getting outside of your self-made insulated bubble to be able to make an informed decision – aka neutrality.
Real estate, like politics, is a spin laden industry whose health is very difficult to gauge if you rely on people and institutions who have a vested interest in the outcome. i.e. Wall Street, rating agencies, government, banks, real estate agents etc.
Some interesting points made:
The current “happy housing news” that is all the rage seems to draw a parallel with the pundits who got the election outcome all wrong yet all were experienced in politics. The housing herd is disconnecting from what the data is showing.
A friend of mine shared this video with me, a speech by Pierre Poilievre, MP for Nepean-Carleton, on April 4, 2012, spoke on behalf of the Government on Budget 2012. He is incredibly eloquent, insisting that Canada is not going down the path that the US took. Yet here’s a sobering headline.
Earlier this year I was quoted in the Toronto Star as some sort of bubble veteran that broached the subject of a bubble and I was not surprised to hear the same rationale we heard in the US. Toronto new development was focused on small units to be purchased by investors to rent or flip although defenders rationalized that was how workers would move to the city to expand the economy. Deja vu.
Many believe that Canada is different because prices will only fall for the next few years unlike the US where it was a 6 year fall (2006-2012).
Well, that is still a correction or bubble for nearly the same reasons as the US: government policy, speculation and cheap credit.
My eureka moment
I have long thought that all the housing shows on HGTV ie “Property Brothers”, “Holmes on Homes” etc. were filmed in Canada instead of the US because production costs were cheaper – no! My theory: After the US market tanked in 2006, production was much easier in a housing market where prices were rising, marketing times were fast and credit was readily available. That’s why these shows have continued where “flip this house” in California left off….for now.