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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Manhattan Home Sales Are NOT 80% All-Cash (They Are 45%)

May 17, 2014 | 11:04 am | delogo | Favorites |

Actually, overall Manhattan Home Sales are 45% All-Cash. I want to make sure that the 80% number doesn’t become embedded in our housing market mindset.

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[click to expand]


I’ll explain.

Recently a friend passed along a post in the Washington Post titled: 8 in 10 Manhattan home sales are all-cash and my jaw dropped. The author, who I am a fan of, got this information from Realtytrac, who I am also a fan of, but I knew it was either wrong or misinterpreted.

Over the years I’ve played around with NYC mortgage data, usually incomplete and very dirty, from various sources and have combined that with frontline feedback from our own experience as appraisers, as well as from real estate brokers and lenders. I had come to the conclusion that roughly half of Manhattan home sales (co-op, condo & single family) were probably all-cash and condos are definitely well over 50%. I used the logic that foreign and high-end buyers are a large part of the all-cash market, especially within the new development space. And it makes sense – while condo end loan financing is tight, new development condo end loan financing is beyond tight.

The reason the Realtytrac 80% figure jumped out at me was the fact that co-ops account for about 60% of sales and have the highest concentration of entry level and middle class demographics in Manhattan. I was very skeptical that virtually all the market-majority co-op buyers were paying all-cash, especially in the tepid economy we are stuck with.

So I reached out to Daren Blomquist, Vice President at RealtyTrac who is often the point person on their data releases. I indicated that the 80% figure seemed off and wondered if it excluded the co-op market. It didn’t. However even an 80% all-cash share for only single family and condo sales seemed like a stretch. He said he would look into it and within an hour they could see an issue with their co-op data feed. They were already working on the issue (and why I like Realtytrac). He shared their 1Q14 Manhattan information (I omitted the suspect co-op data) and here are the key numbers:

Their Results
All-Cash Condo Sales 60.78%
All-Cash Single Family Sales 73.08%

I came up with a new methodology, which looked at the ratios seen in Douglas Elliman sales – the largest real estate brokerage company in Manhattan – with a sales mix is generally consistent with the overall market mix and applied their results to the overall market, and I saw this:

Our Results
All-Cash Co-ops 36% (no revised Realtytrac results yet)
All-Cash Condos 58% (similar to Realtytrac’s 60.78%)

I didn’t have the single family (fee simple) results compiled so I went with Realtytrac’s 73% because: their fee simple (condo) data was consistent with ours, the single family market is skewed much higher price-wise than the condo market (i.e. skewing towards cash buyers) and the single family market share is very small. In fact the market share is so small that the overall 45% all-cash ratio wouldn’t change unless I dropped the single family market share down to 6% from 73% but even then the overall cash ratio would only drop to 44% from 45% – so you get my point (my apologies for the excessive wonkiness on this but it was necessary).

As a result and represented in the table at the top of this post, it is reasonable to say that the overall Manhattan all-cash home sale market in 1Q 2014 was 45% of all residential sales. Got it?

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Nathan Pyle’s NYC Basic Tips and Etiquette Book Now Available!

April 16, 2014 | 11:13 pm | Books |

SMALL_COVER_d My friend Nathan Pyle has penned a book: NYC Basic Tips and Etiquette that should be required reading, well at least required viewing for:

  • anyone living in NYC, or
  • anyone planning to visit NYC, or
  • anyone who’s ever read anything about NYC, or
  • anyone who hasn’t thought about going to NYC someday, or
  • anyone not planning to visit NYC, or
  • anyone who’s never read anything about NYC, or
  • well, anyone.

You get what I mean. This book is clearly for everyone.

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You can check it on on his Facebook page or actually buy it on Amazon.

He’s come a long way from making selfie-videos of his basketball dunking prowess. I’ve long been a fan of his art. Nathan combines nice Midwestern sensibilities (he’s from Ohio) with street smarts, artistic talent and a dab of humor.

In fact Nathan’s only shortcoming is his siding with the “GIF” (Graphics Interchange Format) pronunciation camp while I am squarely in the “Sounds like “Jif” as in the peanut butter AND confirmed by the inventor of the “GIF” camp who said, and I quote:

“It’s pronounced JIF, not GIF.”

And the word is getting out, in newspapers, an AMA on Reddit on radio/podcast, etc.

Here are a few samples, I plan to revisit his artwork over the next few weeks. The book even provides instructions on where to eat pizza on a busy sidewalk!!! C’mon people, the value add for that alone is worth well above the very modest price! Here are a few samples…

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Repost: Measuring Manhattan Values By Floor Level

March 25, 2014 | 1:36 pm | nymaglogo | Favorites |

In the spring of 2012 my floor level valuation methodology was illustrated in a great piece in New York Magazine by Jhoanna Robledo called “What Price Height and Light?. The graphic and accompanying descriptions provide incredible clarity to a fairly convoluted subject.

In the flurry of transitioning content to our new site over the past few months, I remember the actual moment when I deleted the original post for this topic by mistake and thought, “wow this is annoying but I can always go the Wayback Machine.” However, today someone asked me about the graphic and I couldn’t find my prior post on the Wayback Machine (but I found a bunch of cool stuff) so I am reposting this piece. I really LOVE the graphic that New York Magazine came up with.

The graphic is fairly self-explanatory.

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It’s time to debunk the debunking of the 3 biggest myths about your AMC

March 9, 2014 | 10:00 pm | Favorites |

aeron-chair

I saw an opinion piece written about appraisal management companies over at HousingWire that made me just about fall out of my chair – and my office chair is a sturdy Herman Miller Aeron so it was quite an unsettling piece. I’ve written about AMCs quite a bit since HVCC came into effect on May 1, 2009 and my last big piece: “Appraising for AMCs Can Be Like Delivering Pizza” prompted a senior executive at one of the largest US AMCs – who we don’t work for – to call me after he read it and say, “all of what you wrote is true – how do we change it?” He sounded very reasonable and earnest and got his Chief Appraiser to reach out to me to explore what to do. That person ended up providing me with robotic and defensive feedback before I even asked any questions – making it clear it was all about keeping his job, not improving the industry. Sad.

Make no mistake – I am not against the concept of AMCs and there are some reasonable ones to deal with – but the majority of them are poorly managed and therefore can only attract appraisers with the “form-filler” mentality.

This HousingWire editorial was called “It’s time to debunk the 3 biggest myths about your AMC” by the CEO of an appraisal management company. We don’t work with them and I don’t know of them or the author. It’s a corporate sounding piece so I’m guessing that it was pitched and written by their PR firm as a way to sell the virtues of a good appraisal management company.

What threw me for a loop was the omission of any discussion about the actual providers of valuation expertise. AMCs do not provide value opinions to banks. AMCs manage appraisers who provide value opinions to banks. My guess is they or the AMC industry in general are receiving more pressure from banks for the rising cost of the appraisal process – not because the appraisal fees are rising – but because the AMC appraisal quality is so poor that relative to the cost, the value-add of an AMC really isn’t really there.

We have started to observe national lenders push back against the poor quality of AMC appraisals and some lender personnel are now bypassing AMCs on complex or luxury properties because they don’t trust the expertise coming out of the AMC. Amazing.

Here are the 3 “myths” presented in this AMC PR piece. I restate each point being made to reflect the reality of the appraisal process:

From the Housingwire guest editorial:

THEIR Myth 1: Appraisal Management Companies add costs to the lender’s business.

So, yes, the costs of putting a solid value on a piece of real estate have gone up. But this is not due to the fact that an AMC has been added to the equation. It’s due to the fact that it costs more to do it right, to employ the technology, to manage the fee panels, to quality-check the results. Like most myths, this one has at its core the ugly truth that the price of an appraisal has gone up between $80 and $200, depending upon the circumstances.

MY Opinion of Myth 1: The rise in costs is NOT because appraisers are arbitrarily raising their fees. It is because the appraisal management industry takes half of the appraisers fee paid by the borrower at application to cover their costs and ended up driving most good appraisers out of retail bank appraisal work – now dominated by AMCs. The rising costs are being born by the AMCs who try to checklist away the poor quality. Here’s how: Imagine making a modest salary for a job well done and then one day (May 1, 2009) you get your pay cut in half. The middleman between the bank and the appraisers (the AMCs) got to keep the other half of the appraiser’s fee/salary. In reality, this 50% pay cut was the appraiser paying for bank compliance with HVCC by hiring the AMC. Would you quit your job if you got a 50% pay cut? Most would say yes. Who would replace you at 50% of an already modest wage? A lower caliber, lesser experienced person who was able to cut corners – like eliminate research – and essentially be willing to be a form filler rather than a valuation expert – quality evaporates not matter how much “review” is put in place. AMCs have been grappling with poor quality and probably have had to increase oversight as more banks push back against the poor quality. I think the additional compliance issues being touted throughout this opinion piece in this “Myth” are probably more of a scare or fogging tactic than a real reason for higher costs. The higher cost that is being represented by the AMC is more likely from the fact that AMCs are being forced to find better appraisers in certain markets and those appraisers are less willing to subsidize bank compliance with HVCC out of their own hide. We doing more and more AMC work now and we are paid a full fee and are given a fairly reasonable turnaround time. Why? Because that AMC’s panel quality was poor and their bank clients basically told the AMC to use firms like mine or the bank will go to another AMC who will use a higher caliber of appraiser.

THEIR Myth 2: AMCs deliver poor turnaround times that can’t compare to internal teams

Anyone who buys into this myth must live in a world without Service Level Agreements (SLAs) that spell out exactly what a vendor will provide to a lender. It sets the terms of the engagement and specifies penalties that the vendor will suffer should it fail to live up to the promises the document holds. Turnaround times are always part of the SLA between an AMC and a lender…Now, here’s the grain of truth at the center of this ridiculous myth: lenders are working to incorporate so many new compliance rules into their processes that the collateral valuation process is simply taking longer for many of them than it has in the past. Part of this comes from the fact that compliance checking takes time. Part of this comes from unnecessary processes within the lender’s shop that exist out of some executive’s fear of possible compliance problems. The appraisal process is taking longer in many cases, but it’s not due to the AMC. It’s just part of the new business environment we’re working in.

MY Opinion of Myth 2: This is simply a reframing of the conversation between lenders and AMCs. The biggest problem with most AMCs today is they demand an unreasonable turn around time – some require 48 hours (more with complex properties), about 1/3 the minimum average time needed to do a reasonably competent job. Because the AMC bank appraisal quality is generally poor, AMCs have to insert more and more checklists into the QC process to appease their lender clients. The lender clients require more service level agreements BECAUSE THEY DON’T TRUST THE QUALITY OF THE PRODUCT, NOT BECAUSE OF MORE FEDERAL COMPLIANCE ISSUES. In turn, the appraiser gets a gum chewing 19 year old who calls them every day to fill out a checklist. Banks were fine, pre-HVCC, with the turn times of their in-house and outside fee panel staff and it NEVER was as fast as the typical AMC requires today. Today, most AMCs have to differentiate themselves from other AMCs by cost and turn around standards. With the poor quality of the typical AMC bank appraisal, the AMC gets squeezed financially as banks and appraisers are beginning to push back with more requirements and costs. An appraisal is NOT a commodity – it is a professional service. If the AMC doesn’t respect the bank appraisal industry and pays them poorly, all the AMC can ever hope to receive in return is a poor quality product that can’t be check listed away.

THEIR Myth 3: The lender relinquishes control when they outsource to an AMC

The lender is in complete control at all times and federal regulators have made it crystal clear that the lender is the responsible party anytime they outsource to a third-party vendor. No lender will relinquish control to a third party when it knows the CFPB will come back to its front door in the event of a problem. There are some aspects of the collateral valuation process that the government has said must be removed from the control of the loan officers originating the loan and the managers who oversee them. Federal regulators do not want the lender to control the outcome of the appraisal process and so they have made it clear in the regulations that it must be moved away from the origination department. The uncomfortable truth is that the federal government wants the lending institution to lose a bit of control here, for the good of the consumer and the financial institution. But handing responsibility for a few aspects of one process to a third-party outsourcer is not the same thing as giving away control. No lender we know and no good AMC executive would equate these two.

MY Opinion of Myth 3: One of the biggest myths furthered by many AMCs is to fog lenders with the idea that HVCC requires banks to use them to be compliant. The statement “The uncomfortable truth is that the federal government wants the lending institution to lose a bit of control here” is very misleading. All the government wants is a separation between the sales function and the quality function of a bank – a firewall – which is an AMCs major selling point. The irony here is that large AMCs are just as susceptible to lender pressure as the individual appraisers, but on a much larger scale.

I am not anti-AMC. However I am against bank appraisers paying for a bank’s compliance with HVCC and being marginalized as a result. The appraiser is the expert developing the value opinion for the bank, not the AMC.

In my experience to date, the majority of AMC bank appraisals that I have seen are very poor. But it doesn’t have to be that way. If the lender paid the market rate for an appraisal and an additional fee for the AMC to administer the process, the quality would improve. Borrowers today generally don’t realize that the bank appraisers is paid a fraction of the “appraisal fee.” Today’s bank appraiser is paying for the bank’s compliance with HVCC and this has largely destroyed many of the quality firms in the appraisal industry. It doesn’t help that the residential appraisal industry has no real representation in Washington.

But I do like my chair.

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Valuing the Light in Your Condo or Co-op

December 3, 2012 | 11:05 am | nymaglogo | Favorites |

Jhoanna Robledo over at New York Magazine squeezes light from my proverbial turnip and the result is a very cool graphic on one way to value light in an apartment in her piece “What’s the Price of Light?” The topic of view have been recently explored and floor level.

Light is perhaps the most subjective of the view-floor level-light trio but this is the logic our firm has used for years (based on the “paired sales” theory that isn’t very practical in an appraiser’s daily life) but I feel it’s a good starting point, and of course it depends on the nuances of each situation.

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[ChartFloor] Manhattan Price Per Floor Breakdown

June 9, 2010 | 6:18 pm | trdlogo | Favorites |

trdfloorlevel

Floor pricing has been the stumbling block for credibility with automated valuation models (appraisal replacement tools) used by banks and for services like Zillow. StreetEasy gets it right, in the way they display information – grouped by building so the patterns are apparent.

Matthew Strozier over at The Real Deal Magazine asked me to crunch apartment prices to show some sort of floor level relationship to value. I took the down and dirty approach (because SPSS is way over my head) and looked at all closed co-op and condo sales in 2009. I broke those sales down by floor level and crunched the metrics for each floor. The results are seen in this very cool chart. Click on the graphic to the right that TRD created to open the big version.

  • First Column – % share of units on that floor compared to all sales in 2009
  • Second Column – floor level
  • Third Column – Average Price per Square Foot of all sales in 2009 on that specific floor.

Some observations

  • 1st floor – 19.3% jump to second floor reflecting concerns about security, privacy and noise levels.
  • 2nd floor – 11.4% jump to third floor reflecting concerns about security (scaffolding), privacy and noise levels.
  • 7th floor – jump reflects penthouse and roof line breaks from adjacent 6 story buildings.
  • 13th floor – data suggests only 18.4% of buildings with a 13th floor actually call it that.
  • above 13th floor – market share declines with height, reflecting fewer apartments and the floor level price per square foot continues to rise.

In addition, the erratic price per square foot patterns on the higher floors reflect the differences in views. In our appraisals were make adjustments for floor level and view separately.

I ended the presentation at the 25th floor only because the data set gets so thin that it was more difficult to extract or infer a pattern.

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[Terra Logic] Understanding The Value of Manhattan Apartment Outdoor Space

May 5, 2010 | 9:19 am | Favorites |

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Through the process of valuing terrace space in Manhattan since the mid-1980′s we developed a logic or valuation methodology for this amenity. I am asked to explain the process several times a week and it finally dawned on me to write about it (I can be slow to the draw sometimes).

BACKGROUND
Back in the mid-1980′s when we began our company, attempts to value terrace space by the real estate community (appraisers and agents) was approached as a lump sum dollar value rather than establishing a relationship with the value of the interior space of the apartment itself (ie that particular terrace is worth $50k) which I derided as the PFA (pull from air) approach.

Outdoor area was valued quite primitively as fixed asset, with little consideration to variations in size (other than “small” and “large”) and its relationship to the apartment it was attached to (the same logic was incorrectly used with roof rights). We would see large terraces attached to one-bedroom apartments treated the same as if it were attached to a 12 room apartment. Crazy.

In fairness, this “terra logic” wouldn’t have been possible without the evolution of price per square foot as a core price metric in Manhattan. Market participants were talking and thinking about it but it wasn’t formally analyzed. We were the first appraisers to introduce price per square foot for co-ops in our appraisal reports by presenting all sales within the building to bracket the price per square foot of the subject apartment, and the first to introduce it into our market reports as a formal analysis. It was difficult because square footage is not a matter of public record and most co-op listings did not include square footage. We had amassed the information during our normal course of business.

Gotta love the completely ridiculous valuation metric “price per room” which admittedly we used in the early 1990′s in our first market reports until it morphed into price per square foot. Incredibly, price per room is still presented today. Imagine a buyer telling a broker “I won’t pay a dime over $135,000 per room.” Good grief.

Valuing Outdoor Space

METHODOLOGY
We have found that a ppsf analysis on finished terrace space is generally a reliable form of valuation to determine what the terrace area contributes to the overall value of the apartment being appraised. Its a relational value – if the apartment is worth more, that carries over to the outdoor space. This logic applies to patios, garden areas and balconies. Doesn’t matter whether it is a co-op, condo, highrise, lowrise or brownstone.)

Here’s how

  • Estimate the ppsf of the property without the terrace
  • The general relationship between finished terrace space and interior space – terraces are typically valued at 25-50% of the ppsf of the interior space.

For example – if the interior space was worth $1,000 psf, without considering the terrace, the outdoor space could be worth as much as $500 psf (50% of interior ppsf). If the terrace is 500 sqft, the terrace could be worth $250k ($500/sf x 500 sq ft).

That’s the basic idea. Simple. Of course there are many other factors such as:

Utility

  • depth – a 500 sq ft could be a deep terrace or a shallow 2 ft deep wrap around – same sq ft but different value.
  • location – a 2nd floor terrace overlooking a busy north/south avenue has more noise and soot as well as a lower perception of security
  • privacy – space that is not formally separated from the adjacent apartment terrace space has lower value
  • Obstructions – such as a parapet that blocks the view from the terrace. View itself is NOT a terrace amenity since it is considered in the ppsf of the apartment. A skylight or risers are usually deducted from the square footage.

Size

  • oversized space – if the terrace is greater than 50% of the interior space, the ppsf contribution falls off considerably for the additional space over the 50% threshold. For example 700 sq ft 1-bedroom apartment with a 3,000 sqft terrace – only about 350 sq ft has any meaningful value (of course, if the maintenance charges reflect the entire terrace, any value of the terrace would be wiped out.

Association

  • primary amenity – The patio or garden in a ground floor brownstone or apartment – use the same logic as when considering a terrace in a penthouse apartment.

Comparing apartments with and without outdoor space

One of the reasons penthouse or any apartments with significant outdoor space sell for a higher price per square foot is that the sq ft denominator in the price per square foot equation only considers interior square footage. To create more parity between the two types of apartments for comparison purposes, calculate the adjusted price per square foot of the apartment. In order to do that you need to theoretically convert the outdoor space into interior space.

In the prior example, we said the terrace was worth 50% psf of the of interior space ($500 v. $1000). Use the same relationship with size and give the space full credit for interior space by taking 50% of the terrace space (500 sqft x .5 = 250 sqft) and add it to the existing interior square footage: 1,000 interior square feet + 250 interior square feet representing 500 square feet of terrace = 1,250 adjusted square feet.

This makes it easier to compare units with and without terraces and is predicated on the whether your % discount assumption for your exterior space is correct.



Disclaimer: No comments by an appraiser would be complete without a disclaimer. It is important to note that these are only rules of thumb to guide you – the value of a terrace is not formula driven – these relationships are developed from market data and can vary significantly depending on the combination of amenities and time. If you are unable to grasp this, close your eyes very tightly, think about a cool ocean breeze on a warm breeze sandy beach, while holding a large set of perfect comps, until memories of this post fade completely away.


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Lobster Prices And Subprime Lending

July 5, 2009 | 11:51 pm | Favorites |

This weekend I ripped through a terrific book The Secret Life of Lobsters by Trevor Corson written back in 2004. Even if you’re not a fan, I marveled at how he could take a mundane subject and weave an interesting (true) story on how the Lobstermen of Maine have kept the production elevated for the past several decades, despite consistent claims of overfishing. (Incidentally my lobster pots were stolen this weekend, plus we had 30 family members over to our house for the 4th for a lobster/clam bake.)

No one on either side really knew whether cyclical declines in the number of pounds caught were natural or induced by man.

In other words, this is all about subprime lending.

While trying to find my interview on NPR about last week’s market reports (I was unsuccessful) I stumbled upon an interview with the Trevor Corson last week (the day our report was released) without using keywords such as “lobster,” “fishing” or Maine.

(about 38 seconds in)

He correlated the sharp drop in Lobster prices this year with the bankruptcy of Iceland via subprime lending. It’s worth a listen.

And here’s his related piece in The Atlantic magazine. Fascinating.

Basically, lobster prices have maintained a high price level for the past decade until the past year because a large portion of the catch was diverted to processing plants in Canada keeping supply of fresh lobsters restrained. These plants were mainly financed by Icelandic banks, who were ultimately driven under because of the subprime mortgage meltdown and now abundant production of lobsters are driving down the price for us.

Sound familiar?

Oversupply of housing driving down prices correlates to the “V-notch” technique to increase the lobster population. I won’t even bring up the V-shaped recovery“, since I’m still full from our lobster bake.

Somehow it all comes back to lobsters.

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1-Across Is No Puzzle

May 19, 2009 | 4:06 pm | trdlogo | Favorites |

trdMay09crossword

The Real Deal Magazine, one of the best resources for real estate information on the New York housing market, also delves into the world of crossword puzzles in each monthly issue.

You know you’ve arrived when you make it to 1-Across.

Stumped?

Ok, back to work.


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