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.
Some thoughts about the Fed’s QE3 as it relates to housing (Einstein defines insanity as doing something for a 3rd time hoping it works).
-Focus of QE3 seems to be housing, but it shows how little Fed understands housing since this seems to be an effort to press borrowing costs lower.
-Falling rates until now have increased affordability 15% this year but reaction in sales is less. A diminishing return for this action. Yes it temporarily helps but is more akin to the 2010 tax credit – remove it and consumers stop buying.
-Fed must believe recent “happy housing news” isn’t sustainable. Prices and sale generally showing improvement.
-Banks prob won’t drop rates all that much-could even see a slight increase in short term: admin backlog from existing business, guarantee fees by Fannie Mae to kick in a few months and spreads already low. This action provides little traction.
-QE3 doesn’t address THE REAL PROBLEM – mortgage underwriting remains irrationally tight. Smaller universe qualifies for mortgaged and a large number of contracts fall through – approx 15%.
-Telegraphing low rates through 2015 eliminates any urgency for consumers to take action. National volume up YOY but 2011 was the aftermath of 2010 tax credit so comparing against low.
If only weâ€™d had more power, we could have kept the financial crisis from getting so bad.
But power and authority had nothing to do with whether they could see a bubble.
In 2004, Alan Greenspan, then the chairman, said the rise in home values was â€œnot enough in our judgment to raise major concerns.â€ In 2005, Mr. Bernanke â€” then a Bush administration official â€” said a housing bubble was â€œa pretty unlikely possibility.â€ As late as May 2007, he said that Fed officials â€œdo not expect significant spillovers from the subprime market to the rest of the economy.â€
I maintain that because of human nature, mob mentality, or whatever you want to call it, all regulators drank the kool-aid just like consumers, rating agencies, lenders, investors and anyone remotely connected with housing. Regulators are not imune from being human.
Once the crisis was upon us, the Fed and the regulatory alphabet soup woke up and began drinking a lot of coffee.
Which is why it is likely to happen again.
Whatâ€™s missing from the debate over financial re-regulation is a serious discussion of how to reduce the odds that the Fed â€” however much authority it has â€” will listen to the echo chamber when the next bubble comes along.
I think this whole thing started with the repeal of Glass-Steagal where the boundaries between commercial and investment banks which were set during the Great Depression, were removed. Commercial banks had cheap capital (deposits) and could compete in the Investment Banking world. But Investment banks could not act like commercial banks. Their access to capital was more expense motivating them to get their allowable leverage ratios raised significantly. One blip and they go under.
Stronger regulation and supervision aimed at problems with underwriting practices and lendersâ€™ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates.
This seems to be splitting hairs, doesn’t it?
Low rates triggered the housing bubble as money became cheap and easy to get. If the Fed hadn’t kept rates too low for too long, the bubble would not have happened. The regulatory system was ill prepared for the insanity that followed. House prices rose so fast that underwriting had to evaporate to keep the mortgage pipeline full. Regulators hadn’t seen this before and with the removal of Glass-Steagal and Laissez-Faire mindset, everyone in DC, including Congress and regulators, drank the Kool-aid.
Mr. Bernanke has pointed to the Fedâ€™s extraordinary efforts to stem the crisis, including the creation of new lending vehicles to banks and a reduction of bank-to-bank interest rates to virtually zero, as evidence that the Fed has a firm grasp of what the economy needs. The Fedâ€™s handling of the crisis has been widely praised by economists.
The Treasury and other government agencies already have supervisory power over parts of the financial system, but so, too, does the Federal Reserve.
In his talk on Sunday, Mr. Bernanke acknowledged as much, rattling off a list of regulatory efforts the bank made to address nontraditional mortgages and poor underwriting practices.
But, he said, â€œthese efforts came too late or were insufficient to stop the decline in underwriting standards and effectively constrain the housing bubble.â€
All regulators are human and subject to mob mentality just like politicians and consumers were. Everyone is awake now. That’s why I think a “bubble czar” type position is silly. I’m not blaming the Fed or Bernanke. Now about Greenspan….
In fact I think the Fed has done an excellent job keeping our financial system from the brink. Lets recognize Bernanke’s comments for what they are – dodging the minefield of Congressional approval. God help us if Congress is able to audit the Fed. Its not the audit I object to – its the politicalization of it. We need to keep the Fed neutral (in theory).
Alan Greenspan prided himself on being opaque. The former Federal Reserve chairman used to joke that if the audience thought he was being clear, they probably misunderstood what he was saying.
Bernanke believes in transparency. With everyone hanging on every word of every report, every pundit, every TV show, every government official release etc., I’m not quite sure this doesn’t create a lot of more volatility. But if we could have the Fed Chairman on theDaily Show?
At one point in his remarks, Bernanke, recounting just how rigorous the stress tests were, explained that “More than 150 examiners, supervisors, and economists” had conducted several weeks of examinations of the banks. That kind of let the cat out of the bag. If you do the arithmetic, that is about seven supervisors per bank, and all of the stress-tested 19 banks were hundred-billion and up outfits. When an ordinary commercial bank, say a $10 billion outfit, undergoes a far less complex routine examination of its commercial loan portfolio, it involves dozens of examiners.
So the stress test was not a set of rigorous examinations at all, but a modeling exercise using the banks’ own valuations of their assets.
It’s kind of like trying to help the economy by providing aid to large corporations who are most visible, yet represent only a small portion of the economy. On second thought big banks don’t represent a small part of the economy so I guess I am referring to the absence of help to a large portion of the banking system – lenders with less than $10B in assets.
A slow leak of information, talk of green shoots and glimmer fill the headlines when it comes to banking. It’s $75B rather than $3.6T we should probably be talking about.
Why does this matter to real estate? Cause it’s linear.
Banks => Credit => Housing
Actually I am not sure I disagree with the Geithner/Bernanke mindfreak that we are seeing since it seems to be helping restore some confidence in the future of the economy. I guess I get irritated when I know am being managed or perhaps, (my) ignorance would be bliss (ful).
This week I reflect on the media explosion over Manhattanâ€™s housing woes (A1 NYT version) and Nightly Business Report and some of the remaining gatekeeper thinking. While London is falling down but not as much, itâ€™s time to revisit the word â€œrecovery.â€ Bernanke said recovery in 2010. Technically itâ€™s not a recovery when â€œLâ€ or â€œJâ€ shaped. I also recommend a great Inman story on non-experts and social networking.
Privately-owned housing starts in February were at a seasonally adjusted annual rate of 583,000. This is 22.2 percent (Â±13.8%) above
the revised January estimate of 477,000, but is 47.3 percent (Â±5.3%) below the revised February 2008 rate of 1,107,000.
Every year at this time the metric is always discussed in the context of its prior month change rather than the prior year result. It’s March and this metric is based on February data. Housing starts nearly always rise starting at the beginning of the year. In all the press coverage, little or no attention was placed on the fact that starts are 47% below last year at this time, providing an illusion to the uninformed that construction is booming.
So my initial takeaway from this announcement and the ensuing buzz was, predictably, skeptical.
Last week the Dow jumped, and even though it has no direct correlation with the housing market, people were noticeably upbeat about the improvement in the stock market. This week – more of the same.
My initial takeaway was again, predictably, skeptical.
This provided some closure (not to the victims) on this horrendous financial situation. Nothing to be skeptical about.
The AIG $165M bonus debacle became the next event to focus on. It certainly appears that these bonus payments were enabled by Congress and Treasury from the beginning and feeble attempts were made to say “gee, contracts were signed and therefore we need to honor them.”
The public isn’t that stupid and responded in outrage and now suddenly every government servant from the president on down now suffers from a case of righteous indignation. The AIG audacity of paying these bonuses, along with Thain’s bathroom renovation, is clearly the symptom of a larger reality distortion and one of the reasons we are in this mess. Yet if this is a crisis of confidence and the $165M represents peanuts relative to the trillions at play, its symbolism is far more important – at least for now. Merrill Lynch bonuses are next on the radar.
Subscribe to receive additional insights and research (coming soon).
About Jonathan Miller
Jonathan Miller is President and CEO of Miller Samuel Inc., a real estate appraisal and consulting firm he co-founded in 1986. He is a state-certified real estate appraiser in New York and Connecticut, performing court testimony as an expert witness in various local, state and federal courts. He holds the Counselors of Real Estate (CRE) and Certified Relocation Professional (CRP) designations. He is an Appraiser “A” Member of the Real Estate Board of New York and a member of Relocation Appraisers and Consultants, Inc. Learn More...
Subscription Service Coming Soon
You'll be able to choose from an array of robust housing metrics compiled using research developed during the preparation of our market report series. Expanded significantly from prior offerings, use this resource to build charts and custom data tables or leverage your own information for more powerful research and presentations.
In the meantime, here is the free aggregated data we currently provide.
“Why is Jonathan Miller’s Matrix required reading? …He grabs you right from the start.”–New York Times
“New York real estate maven Jonathan Miller.”–Slate
“The oracle of New York City real estate: Jonathan Miller.”–Amir Korangy, Publisher, The Real Deal
“Our sherpa in the land of broker euphemism for the current state of the housing market.”–New York Observer
“Jonathan Miller, the go-to expert on all residential real estate figures.”–Crain’s New York Business
“A combination of Godzilla, King Kong, and Hurricane Katrina all wrapped up in one as he wreaked havoc on the housing market.”–New York Sun
“A Curbed reader goes all 'Jonathan Miller' on us.”–Curbed New York
“Jonathan Miller, the appraiser who is the savviest observer of the local residential market.”–Crain’s New York Business
“Should we have seen this coming?...I spoke to appraiser Jonathan Miller 3 years ago.”–CNBC
“Jonathan Miller’s blog Matrix. Completely Keanu Reeves-free real estate economics, not for beginners.”–Curbed San Francisco
“His quarterly reports on the New York City-area market is considered required reading among real estate professionals.”–Reuters
“Jonathan Miller...Manhattan’s most revered independent appraisers of residential property.”–Daily Telegraph (UK)
“In the real estate world, Jonathan Miller is where street-smart meets book-smart.”–Jed Kolko, Chief Economist, Trulia
“Jonathan Miller is well-known for taking the pulse of Manhattan real estate.”–PBS Nightly Business Report
“If New York real estate is a sport, one of its most prominent score keepers is Jonathan Miller.”–New York Daily News
“Jonathan Miller delivers real estate news in language even a blogger can understand.”–Curbed DC
“When it comes to markets trends, nobody knows the multiple NYC real estate markets better than Jonathan Miller.”–John L. Heithaus, CSO, BuyerMLS
“Check out Superstar Appraiser Jonathan Miller’s blog Matrix for the latest in depth information on NYC housing.”–Urban Digs
“Jonathan Miller: One of the best finance people on Twitter.”–Business Insider
“Miller is the best real estate blogger out there.”–Bankrate
“Jonathan Miller is one of the icons of the real estate industry.”–Real Estate Board of New York
“Our man Jonathan Miller drops the truth bomb.”–Barry Ritholtz, The Big Picture Blog
“JM makes real estate stats talk in language that normal people understand.”–Teri Rogers, Brick Underground
“Jonathan Miller, the most popular guy on the block when talking about real estate in New York.”–Tom Keene, Bloomberg Radio
“Miller’s more than 20 years of real estate experience comes out in this no-nonsense blog.”–Seeking Alpha
“Jonathan is a legend, one of the most quoted appraisers and experts in the industry.”–Dottie Herman, President and CEO, Douglas Elliman
“It’s tough to find the good guys..Fortunately we found one. His name is Jonathan Miller.”–Glenn Beck, CNN
“Jonathan Miller: One of the top 25 most influential U.S. real estate bloggers.”–Inman News
“Miller is arguably the most influential voice in residential property valuation markets today.”–Altos Research
“Jonathan Miller: He's the guy with 'boots on the ground' when it comes to real estate.”–Bloomberg TV: Bloomberg Surveillance
“A web site 'worth visiting.'”–Realtor Online Magazine
“Then there is Miller’s authority in residential appraisals.”–Reuters
“Jonathan Miller: Best online real estate expert.”–Money Magazine
“Matrix: One of the top five U.S. real estate blogs.”–Inman News
“If market guru Jonathan Miller said it, it must be true.”–Stuart Elliott, Editor-In-Chief, The Real Deal
“Expert Appraiser Jonathan Miller: New York City’s Real Estate Data Wizard”–Epoch Times
“Jonathan Miller, an appraiser dubbed 'the Wikipedia of Manhattan real estate.'”–Barrons
“Miller Samuel CEO Jonathan Miller holds the key to the luxury real estate market.”–Deirdre Bolton, Anchor, Fox Business
“Market Analyst Jonathan Miller: Thank the Flying Spaghetti Monster he's on our side.”–Curbed Miami
“Jonathan Miller...one of the nation’s most prominent appraisers.”–Money Magazine
“Renowned appraiser and [Matrix] real estate blogger, Miller is a statistical wizard. Can dodge bullets in slow-mo.”–Real Estate Tomato
“Jonathan Miller, the demigod of New York real estate stats.”–New York Observer
“His market reports are to the Manhattan housing market what those brackets are to the NCAA Tournament.”–New York Observer
“Jonathan Miller delivers the unflinching and un-fluffy truth about an industry he knows inside out.”–Teri Rogers, Brick Underground
“Somebody-explain-this-crazy-market-to-me guy Jonathan Miller.”–Curbed New York
Read my latest Bloomberg View column Income Inequality Hits the Housing Market. This article turned out to be my most-commented on piece so far. The topic of affordability generates a hotbed of conversation. Here’s an excerpt… There’s been plenty of… Read More