With Oil In The Mix, Asset Prices Are Expected To Simmer Down

August 28, 2005 | 12:18 am | |

houseupstairs

Greenspan said today that the US housing boom is sure to end eventually and there should be a drop in home prices.

[Webmaster’s Note: I’m am fairly certain most people do not believe the housing boom will go on forever so tell us something we don’t know.]

A weakened housing market would take the punch out of an inflation threat and therefore the pressure off the Fed to keep raising short term rates. Consumer spending is reported to account for 70% of the US economy and this driven largely by the ability to tap home equity.

housinginhand

To date, some US economists believe the “wealth effect” of housing are offsetting the negative influence of rising oil prices. [Note: Paid Subcr.] The ability to pull equity out of the housing sector has helped consumers maintain discretionary spending despite rising oil prices.

Besides rising oil prices, labor costs are expected to rise keeping pressure on the Fed to raise short term rates.

The Fed believes that home prices will continue at their brisk pace through the third quarter, before easing in the final quarter of the year.

Here’s a great article written last May called “Don’t Buy Housing Bubble Propaganda” by the webmaster of one of the best economic blogs out there: Big Picture

The author discusses mortgage rates and changing demographics better than any article I have read on this topic. One item of particular interest: More than 80% of all stock purchases are speculative. According to the NAR, housing is currently at 23% which seems to pale in comparison, doesn’t it?


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Eminent Domain: Nice Home, I’ll Take It

August 27, 2005 | 8:56 pm |

Eminent Domain refers to “the power possessed by the state over all property within the state, specifically its power to appropriate property for a public use.”

The valuation principal behind this is the idea that the highest and best use for the property will benefit the public which supercedes the private property rights of the property owner. This has been unnerving to many because property ownership is perceived as a basic tenent of citizenship in this country.

Last week, the Supreme court announced that it would not re-visit [Note: Paid Subsc.] the controversial ruling made in the eminent domain case, KELO et al. v. CITY OF NEW LONDON et al.

In the original decision, the Supreme Court found that local governments have the right to take private property if it faciliates economic growth. The New London case was controversial because the area to be taken was comprised of residential homes that were not blighted or crime-ridden. Another sore point was the fact that developers are making a profit against the loss of private property.

Before the New London case, the Poletown case in Michigan 20 years ago was seen as a leading symbol of eminent domain abuse.

There is the potential for abuse by government authorities in these takings and the fear of a land grab by developers who have strong political connections with local governments. This ruling has begun to prompt states to examine when a government should take private land, what methodologies should be used for fair compensation as well as others

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Live From Wyoming: Low, Risk Premiums

August 27, 2005 | 2:09 pm | |

hills

Greenspan spoke this week at symposium, held in Jackson Hole, Wyoming, sponsored by the Federal Reserve on the legacy of his 18 year era. He took the position that the housing market now suffers an imbalance.

The Federal Reserve is paying closer attention to the rising values of assets such as stocks, bonds and homes, as low interest rates encourage more risk-taking, Fed Chairman Alan Greenspan said.

Low “Risk Premiums” (A new mantra?) This trend reflects what Mr. Greenspan said was the increased willingness of investors to accept low “risk premiums, a willingness based on a complacent assumption that the low interest rates, low inflation and strong growth of recent years are likely to be permanent.”

tightrope

His concern is when (bond) investors become more cautious, yields will rise, lowering housing values and then selloff of bonds that caused rates to drop in the first place. “This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.”

Other notable Greenspan-speak, etched in the public conscience are:

A Conundrum – An inverted yield curve appears to loom on the horizon.

A Frothy Housing Market – “The Fed feels it needs to squeeze more air out of the market – the housing market in particular, although the Fed has stressed that it’s not targeting housing with interest-rate policy.”

Irrational Exuberance – Greenspan first used the phrase in 1996 several years before the stock market corrected in 2000 but it came to define the rapid run up in stocks in the 1990’s. The analysts that missed the dot com bubble now seem to be the ones warning us about the housing market boom’s eventual conversion to bust.


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Turning the Bond Market Upside Down: Inverted Yield Curves

August 27, 2005 | 10:01 am |

yieldcurveinverted According to Investopedia.com an inverted yield curve is a “Usually a chart showing long-term debt instruments that have lower yields than short-term debt instruments. It is sometimes referred to as a negative yield curve.” But they are cause for concern: “History has shown that inversions of the yield curve have preceded the last five U.S. recessions. The yield curve can accurately forecast the turning points of the business cycle.”

invertedyieldsign

Why would investors accept lower long terms rates than short term rates?

According to SmartMoney.com “The answer is that long-term investors will settle for lower yields now if they think rates — and the economy — are going even lower in the future. They’re betting that this is their last chance to lock in rates before the bottom falls out. Inverted yield curves are rare. Never ignore them. They are always followed by economic slowdown or outright recession as well as lower interest rates across the board.”

Perhaps this is an indicator that the economy will stall, and rates will go down even further. Stay tuned.

See previous post Yield Curve Enters Kitchen Table Talk


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Housing Stats Send No Clear Message, Well Sort Of

August 25, 2005 | 9:26 pm | |

rollercoaster

A slew of seemingly conflicting, or at a bare minimum, entangled housing related statistics have been released over the past few days. Each statistic is generally covered as the subject of a story rather than combined into one analysis, the results often contradict each other. Here are some headlines grouped by their indicated trends for the month:

Headline Summary – Improving Conditions (sort of):

Associated Press: Rates on 30 – Year Mortgages Decline
MarketWatch: New-home sales surge to record 1.41 mln [Note: Reg.]

Headline Summary – Weakening Conditions (sort of):

Wall Street Journal: Economic Data Send Mixed Signals [Note: Paid Sub.]
New York Times: The nation’s long housing boom appears to be losing steam.
New York Times: Rents Head Up as Home Prices Put Off Buyers
Wall Street Journal: Rise in Supply of Homes for Sale Suggests Market Could Be Cooling [Note: Paid Sub.]

signs

And The Trend (This Month) Is…

Existing home sales are far greater than new sales so their decline, coupled with rising rents and expanding inventory would appear to indicate a leveling off of the market. But then again, these are July stats, an historically slow period of the year for housing sales, and next month is expected to be more of the same.

What The Real Estate Economy Really Needs:

Washington Post: More Cowbell!

cowbell …sorry, it was late when this was posted.


Crackling and Buzzing: Power Lines/EMF Valuation

August 25, 2005 | 1:25 pm |

The National Association of Realtors has created a resource area called Field Guide to Power Lines. Part of the problem with this issue is that there has been a battle of competing health studies that of course, are on the opposite side of the sprectrum.

Position: Power lines don’t affect property values
This party claims that since there is no definitive proof of a health risk, no loss in value should occur to property owners. The key driver of this movement has been the powerline industry.
[Links]
American Transmission Co.
American Trails From an operational perspective, EMF is not much of an issue for trail activities…
Colgate Univ Term Paper Just a term paper and not a scientific study but it concludes that there is more evidence that says there are limited health risks and on that basis, possibly not detrimental to value.

Position: Power lines affect property values
This party claims that since there is evidence that there is a health risk, a loss in value to property owners should be recognized. The key driver of this movement has been the environmental groups.
[Links]
University of Missouri-Kansas School of Law A review of a case where “…that a tax assessor’s opinion that the proposed power line would not change the assessed value of the property for tax purposes was incompetent and prejudicial…”
Wave-Group An exerpt of the correspondence: “Late last year, New York’s highest court, the Court of Appeals, ruled that the owner of property adjacent to a utility’s high-power electrical transmission lines could seek damages for a decrease in the market value of the property caused by the fear that the power lines might cause cancer, even if such a fear was not medically or scientifically reasonable. That decision has already begun to change the outlook on electromagnetic field (EMF) litigation for utilities.”

Valuation Links
Power Lines and Property Values: The Good, the Bad, and the Ugly An incredibly detailed discussion on valuation approaches for powerline properties.
Realty Times Columns Concludes that homeowners would probably pay less for a property near a powerline just because of the uncertainty.

Common Sense Application for Appraisers
In a valuation matter, where an appraiser is asked to value the effect of power lines on property values, wouldn’t it come down to how the typical homebuyer in a market felt about the uncertainty of risk? In other words, if two properties are identical, but one is located under or near a powerline and one is not and the former sells for less, isn’t that indicative of the effect on value? Whether or not EMF causes cancer or not, if a buyer pays less, it would seem to me that the difference before and after is a quantifiable measure of effect.

What do you think?

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Urban Beats Suburban

August 25, 2005 | 10:46 am |

suburbs In certain pockets of the country, homebuyers are choosing the city over the suburbs as home buyers re-evaluate urban areas. This demographic shift is occuring as baby boomers get older and many urban areas have largely seen a cultural renaissance over the past 10 years.



urban

Growing suburbs are now experiencing the problems of their neighboring urban areas and homebuyers are now considering moving farther out where land is cheaper but the commute is longer.



carinstruments
With oil prices rising, this makes for an interesting situation since commuting costs will rise making the feasability of a long distance commute less likely to be sustained.


In Bad Form

August 25, 2005 | 9:15 am |

For some reason, Fannie Mae was inspired to change ALL the appraisal forms they use, effective November 1, 2005.

This will be a painful conversion process for most appraisers and will generally be met with skepticism for a few reasons:

  • Cost – The new FNMA forms seem to be written to prevent other traditional uses such as appraisals for estate, trust, litigation, divorce and other purposes. The Appraisal Institute, in good faith and possible anticipating a revenue stream, has created AI Reportsâ„¢ Residential Summary Appraisal Report Form. The press release sounds interesting, but Letter Sized formatting for a professional versus legal look? Commercial appraisers generally write letter sized narratives and residential appraisers do not. Think of the thousands of appraisers out there all set up to use legal documents. Once again, the orientation of the AI remains for commercial appraisers. This new form is being developed by all the major software vendors.

Here’s a radical idea. Keep using the old FNMA 1004, 1073, 1075 and other appraisal forms for non-lending use. They are USPAP compliant and appraisers already have the software. I want to see how this shakes out before I consider using the AI form.

  • Liability – The new forms hard code pages and pages of liability pitched back to the appraisers. I call these the silent killers. The text is not that well written creating more confusion to the reader.

  • More data to present – The forms harp on days on market type stats for all of the comps and lots of other detail. In a perfect world, this is great stuff, but the reality is that many markets do not have this level of detail. The added time spent to collect this data warrants a fee increase, yet that likely won’t happen. As a result, we will all get used to inserting Not Available in many of the fields. Again, good intentions by FNMA to catch “flipping” but unrealistic implementation. Bad appraisers will remain bad.

  • More headaches for lenders using OCR software – Some national lenders fought the introduction of these forms, an unprecendented quantity at one time, because all their OCR scanning software and back office systems have to be re-designed to input this information.


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ARM’ed But Ready To Get Fixed

August 24, 2005 | 11:00 pm | |

scale

As the yield curve flattens, that is the spread between long term rates and short term rates is negligible, homeowners are considering making the move from ARM’s to Fixed mortgages [Note: Paid Subscription].

As the supply of fixed mortgages increases when people shift from ARMs because of the flat yield curve, it could mean upward pressure on mortgage rates (ie bond prices down, yields up). Why borrow at a rate for 1 or 2 years when you can have the same rate for 30 years? The effect of the shift in the market is greater in moving from ARM to fixed since roughly 70% of fixed rate mortgages are securitized and 25% of ARM’s are.

But wait! There’s more potential confusion.

The demand for mortgage-backed securities from foreigners is still strong since their yields provide a greater return for investors than treasury notes generally do. Higher demand, means higher bond prices, means lower yields, means long term rates could stay at low levels for a while.



Miami Vice

August 24, 2005 | 10:26 pm |

miamivice

In the Economist print edition: From Coke to Cubists [Note: Paid Subscription] the current surge in Miami condo development is characterized as leading its transformation from drug-dealers’ playground to mainstream metropolis.”

miamimap
Source: The Economist

Roughly 65,000 condos are under some stage of development.

According to a Merrill Lynch study on “Mega Metro Bubbles”, Miami was top on the list. The study analyzed income to price ratios to determine affordability. Miami housing had some of the highest appreciation rates found in the US since 2001.

With all this development, someone got the idea to start a franchise in Miami for flipping condos called, oddly enough, Condo Flipâ„¢ pat. pend. (Coming soon to an overheated market near you.)

Their slogan:
bathtub
Source: Condo Flip.

Seems a bit arrogant, doesn’t it?


Just Get – R – Done

August 23, 2005 | 11:54 pm |

The danger of appraisal inflation is not apparent to many consumers.

The consumer begins to believe the inflated value as valid and it is validated each time the property is over-appraised. When its time to cash out, the fall from the clouds can be unforgiving.

But problems arise when the appraisal is higher than the home’s actual value. Such overvaluation can lead homeowners to overborrow. And later, when they resell, they could learn that the till they thought was full of money contains much less — or nothing at all.

At the end of the day, the homeowner just wants the job done. Herein lies the problem.

Its called “detached from reality.” The mortgage is not being done for the homeowner at all. Its being done on the lender’s behalf to assess the collateral. However, the typical lender sees the report only after it has been through the food chain.

See: The beginning of the end, or how this mess got started


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Boom as in Baby

August 23, 2005 | 10:59 pm |

housejump

Scott Reeves contends, in an article posted on Forbes.com: Don’t Believe The Hype that the booming real estate market is driven by fundamentals including low mortgage rates, increased employment and demand (note: demographics). Its not driven by investors.

Although NAR indicates that 23% of home purchases in 2004 were made by investors, Freddie Mac statistics indicate that the length of homeownership has increased from 6.5 years in the first half of 1999 to 7 years in the first half of 2004. Although this argument doesn’t reflect the recent uptick in housing prices in 2005, it could infer that the market is not being determined by runaway investors aka speculators aka flippers.

babyboom

In fact, NAR says that no more than 3% of all purchasers sell their homes in less than a year.

This is consistent with…

the cascade of baby boomers in their prime earning years who are beginning to think about retirement. Many boomers, real estate agents say, buy a second home with the intention of retiring there–but most are more than happy to sell it in a few years if plans change or if the price is right.

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#Housing analyst, #realestate, #appraiser, podcaster/blogger, non-economist, Miller Samuel CEO, family man, maker of snow and lobster fisherman (order varies)
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