Here’s one way to look at it.
A little over a week ago the WSJ’s Candace Taylor broke the story about 3 contiguous listings to be marketed together at the top of a 15-year old ground lease condo in Battery Park City for $118,500,000. At 15,434 square feet, that works out to $7,678 per square foot. CNBC’s Robert Frank provides more details in a video tour that was broadcast shortly after the story broke.
Normally I don’t bother to do the math on this sort of thing but after the Cityspire listing a while back, I thought I’d tweak my thinking a bit as the luxury market gets more than its fair share of confusing “milestones.”
$56,500,000 ($7,406/sqft) listing - 7,628 sqft 5-bed listed last year for 5 days and removed.
$11,700,000 ($3,330/sqft) purchase - 3,513 3-bed in April 2014.
$19,000,000 ($4,425/sqft) listing – 4,293 sqft 4-bed $23M January listing dropped to $19M, then removed.
$87,200,000 is the aggregate total for the 3 units that total 15,434 square feet ($5,640/sqft). The current list price of $118,500,000 represents a $31,300,000 premium for the combination of all 3 units before we might assume the millions in renovations to combine if you believe that the $87,200,000 total is what aggregate of the individual properties are worth.
Given the $3,330 ppsf recent sales price of the 3-bed and the unable to be sold for $4,293 ppsf after 6 months on market 4-bed and the not-market tested 5 day listing period 5-bed at $7,406, I can’t figure out how the listing agent gets to $7,678 ppsf as an asking price for all 3 together before the cost of renovation to combine? Perhaps the seller set the price.
The listing broker tells us that the pricing “is justified by the square footage“, as well as the views and building’s amenities.”
I really like the way this chart illustrates the 20 year decline in the homeownership rate. A few thoughts on what it shows:
Under 35 – Lowest in 20 years – record student debt and tepid economy plays a significant role in falling rate.
35-44 – most volatile, has overcorrected – large gain during credit boom and fell well below 1994 levels.
45-54 – fell below 1994 levels but didn’t rise as much during credit housing boom.
55-60 – higher than 45-54 group but followed a similar arc – fell below 1994 levels but didn’t rise as much during credit housing boom.
65 and above – only category to finish higher than 1994 levels – not heavily influenced by credit bubble.
Overall – is currently higher than 1994 levels. Coming down from artificial credit bubble high – probably won’t stop declining until credit begins to normalize.
has worried some economists, because it makes the U.S. more vulnerable to major shifts in the global economy. But it also could show strengthening confidence in the American economy.
These gains are largely due to the rising US stock prices rather than more investment. However in the housing sector, I do think rising property values are attracting even more new capital for investment – whether for new development or unit purchases. We can see this in markets like New York City and Miami. Foreign investors seem to be chasing safety and a long term equity play.
Last week I can across Sanette Tanaka’s WSJ column “Spreadsheet” titled “Bless Our Happy Home Sale” that talked about the tradition regarding St. Joseph. I waited to blog about it until today since March 19th is actually St. Joseph’s Day (BTW: who is getting any work done this week with 3/17 St Patrick’s, 3/18 March Madness brackets and now this?).
I love the phrase within the WSJ graphic: “Faith in Action.”
Traditionally, Joseph, the husband of Mary, is hailed as the patron saint of home and family. Some believe that burying a statue of St. Joseph in the yard helps sell a house.
Here’s how it the process works when selling your home:
Bury the St. Joseph statue upside-down in your yard, facing toward the house listed for sale.
Sell the house.
The Seller digs up the statue and puts it in the new home in a special place.
The last 4 years of statue sales show a pattern consistent with NAR’s existing home sale pattern with the housing market rebound beginning in 2011.
Who says housing trend analysis is devoid of emotion. Got it?
There’s a good article in yesterday’s WSJ “Adjustable-Rate Mortgages Make a Comeback” focusing on the rise in their use. In fact the title on the window bar is the web page is “ARM Loans-A Vestige of the Housing Bubble-Are Making a Comeback.“
With mortgage volume down sharply since mortgage rates creeped higher last year, lenders are focusing on jumbo mortgages, especially ARMs that can expand affordability. There’s also a good audio clip embedded in the piece.
Lenders are pricing ARMs roughly 1.5% below a fixed rate, the largest spread in a decade.
ARMs comprised 31% of mortgages in the $417,001-to-$1 million range that were originated during the fourth quarter of 2013, according to data prepared for The Wall Street Journal by Black Knight Financial Services, formerly Lender Processing Services, a mortgage-data and services company. That is up from 22% a year earlier and the largest proportion since the third quarter of 2008.
I find it interesting that many suggest that ARM products – including within this article – were one of the causes of the housing bubble. I disagree. I saw them merely as a tool to be misused, just like a hammer or a chainsaw.
At least for now, with credit remaining very tight, it is unlikely that they would be abused in the same way they were during the prior housing boom. However with the 70% plunge in lucrative refi volume, one has to wonder when business decisions will start to overwhelm risk paranoia.
Roughly 90% of the residential market has passed through Fannie and Freddie since the onset of the financial crisis. Reliance on these institutions was only around 50% before the crisis – and are they making a lot of money for the federal government right now. I’ll leave out the part where FHA stepped in to pick up the high risk slack. The private secondary mortgage market was obliterated by the credit crunch/housing crash and in the half decade that has passed, investors are just now dipping their toes in the water.
There is a great summary piece by Nick Timiraos at WSJ: “What Can Take the Place of Fannie and Freddie” on the proposed Fannie and Freddie “overhaul.”
Big Dumb Banks
As my friend Barry Ritholtz over at Big Picture once told me that the former GSEs are merely “Big Dumb Banks.” In other words, they do as they were told.
Swapping them with another alphabet soup named agency doesn’t solve the problem. In fact, I contend that replacing Fannie and Freddie completely would likely create more problems since little if anything has been done to reduce the systemic risks that nearly brought down the financial system – and whose impact are still being felt by most Americans today.
If we can agree that Fannie and Freddie created a stable mortgage market environment for decades (Fannie since the Depression and Freddie since the 1960s) and then blew up in the recent decade or more (problems began back in late 1990s), there are clearly other issues in play. I’ve always seen Fannie and Freddie as the symptom not the cause of our current economic problems.
Fixing the symptom may make some feel better, but it does nothing to reduce the probability of a systemic credit collapse. The bailout of the GSEs was a result of policy from Washington – the congress, the executive branch and both political parties who in various ways encouraged proactive neutering of regulatory powers, allowed the revolving doors of regulators with Wall Street, allowing Wall Street to compete directly with commercial banks with mind boggling leverage, limited separation of competing interests (ie rating agencies and investment banks) and incentivizing a shifting culture to serve the shareholders over the taxpayers.
I suspect that last point is the impetus for this bi-partisan proposal – reduce the risk exposure to the taxpayer by getting the private market to take over. Congress clearly has an image problem that it is trying to fix as of late (until mid-terms).
Setting Standards to Follow
One of the under appreciated functions of Fannie Mae and to a lesser degree Freddie Mac, was to serve as the leader to the private mortgage market. When Fannie Mae adopted a standard or policy, the private market (ie jumbo mortgage investors), followed their lead. With Fannie and Freddie floating in limbo with a potential looming overhaul, it’s hard to imagine a robust private market developing anytime soon. This would be a completely new institution that would replace and reinvent the former GSEs, you simply invite anywhere from chaos to uncertainty into the financial system and instability to the housing market, a key economic engine for the economy.
The whole plumbing of the mortgage market runs through these companies. You can’t just take these things away without having a very clear and specific view about what’s going to replace them,” said Daniel Mudd, Fannie’s former chief executive, in an interview last year.
No real alternative to the system has been proposed that I’m aware of and this is really window dressing to show bi-partisanship in Washington. There is no time frame proposed and very little details to reinvent the secondary mortgage market have been brought forward.
Here’s a great podcast from WNYC called “Money Talking” featuring Heidi Moore and Joe Nocera covering the proposal.
Key Issues to Fix
The WSJ piece summarizes the key issues that need to be address quite succinctly:
The trouble is, the solution to over-reliance on Fannie and Freddie is too complex for Congress to solve in this era of gridlock. Record revenue being generated by the former GSEs make long term solutions unobtainable for now. I don’t see how any major changes can be inserted into the financial systems for a long time.
My big takeaway was that any housing market improvement will be more affected by local job and income growth rather than the “rebound effect.” This phenomena occurred in markets that were hit hardest by the downturn, yet saw the largest price increases.
I’ve added “rebound effect” to my 2014 phrase list, right after “polar vortex.”
The Wall Street Journal released an intriguing article about the use of glass curtain walls on new buildings: Study: Glass Condos Could Pose Health Threat Through Overheating: Hot Summer Could Raise Temperatures Into Triple Digits.
The piece was inspired by content provided by the Urban Green Council, who are trying to push for more rigorous building standards in the aftermath of Superstorm Sandy. They’ve had a PR bonanza for this one since the story was even picked up by Gawker.
But the findings were disputed by some developers and architects, who said that glass buildings in recent years have made big advances in overall energy efficiency. That includes improved glass with special coatings to reflect heat and more insulated surfaces in building walls, to comply with increasingly rigorous city and state energy codes.
The idea of glass curtain walls became a bigger issue in the recent boom and the current boom than in years past: the technology has improved, and with shift in the mix towards luxury development, the need for expansive views and light to raise values made it more popular. The irony of this is, and this is certainly not a definitive statement, that glass curtain walls can be less expensive for luxury development than using more traditional mortar/window installs if it is not load bearing.
And Toronto seems to hate them (when not writing about Mayor Rob Ford) in this CBC piece: Throw-away buildings: The slow-motion failure of Toronto’s glass condos.
Ilya Marritz at WNYC just posted on this topic with the understated title: People Who Live in Glass Houses are Really Hot. Here’s the radio version:
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.
[Source WSJ: click to expand]
Check out this excellent interactive graphics post at the WSJ on the economy since the recession. My fave is above but there are others worth mentioning. Things are slowly improving but note that in the “consumer” section of the interactive (not above), real wages are unchanged since 2009 (housing prices up 12.1% in past year alone).
I’ve inflation-adjusted housing in some of my charts over the years but it always felt like a double dip since housing is a huge component (42%) of the measurement of inflation.
The issue came up again with last week’s excellent WSJ article on our Manhattan housing figures – adjusted for inflation, housing prices were equivalent to 2004 levels and not adjusting for inflation brought prices to 2006-2007 levels. So I reached out to my friend Jed Kolko, the Chief Economist and Head of Analytics at Trulia who had some thoughts about the issue.
[Jonathan] Is it appropriate to inflation adjust housing prices? I don’t see this done all that often and always wondered if it was appropriate since housing prices (i.e. rental equivalent) are a huge part of the inflation calc?
[Jed] You’re right, that housing prices are an important part of inflation, so it’s a little odd to deflate housing prices by a measure that includes housing prices.
[Jonathan] So when would it be appropriate?
[Jed] The context when it does make sense to inflation-adjust housing prices is when looking over a very long time horizon – like decades – when dollars clearly meant something different than today. In particular, analyses of home prices versus price changes of other assets (like equities) are often (and should be) inflation adjusted in order to show the real return on investment.
[Jonathan] So when would it not be appropriate?
[Jed] The context when it’s definitely not appropriate is when comparing home prices across different cities/metros/regions. Measures of local inflation are hugely driven by home prices, and even local differences in the prices of other things, like restaurant meals or haircuts, are driven largely by local differences in real estate costs. Inflation-adjusting when comparing local home prices is a case of dividing something by itself. The better way to compare housing prices across metros relative to spending power is to divide home prices by income or wages. I did exactly that in this post, as a measure of affordability.
Tags: Jed Kolko