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Boom Bubble Bust

4Q 2009 Philadelphia Housing Holds Steady, Sales Post Unusual Increase

January 26, 2010 | 12:01 am |

This quarterly market report is provided by Dr. Kevin Gillen, an economist and Research Fellow at the University of Pennsylvania’s Institute for Urban Research. He analyzes the Philadelphia real estate market using the city’s real estate database through Econsult, an economics consulting firm based in Philadelphia PA that provides statistical & econometric analysis in support of litigation as well as business and public policy decision-makers. His results are published in a research paper called Philadelphia House Price Indices each quarter as a public service to the Philadelphia real estate community. Here’s his methodology.

Kevin does a great job parsing out the market and it is a pleasure to share his results on Matrix …Jonathan Miller

Download the report and Kevin’s commentary.

Observations

The most recent home sales data indicate a solidifying of the local housing market’s condition after several years of both declining sales and prices.

After two years of falling prices, prices held steady for the third consecutive quarter in 2009 Q4. The typical Philadelphia home rose in value by 0.5% on a quality- and seasonally- adjusted basis this past fall, according to the latest analysis by Econsult economist Kevin Gillen. From the housing market’s peak in 2006 to the recent trough of last winter, the average Philadelphia home had fallen in value by a total of 10.5%. But with the market’s apparent stabilization in the latter part of 2009, the average Philadelphia home has recovered 3.5% of its lost value, thereby reducing its total loss to only 7% since the bursting of the national housing bubble several years ago.



Regulators Are Human. That’s Precisely Why Bubbles Are Not Preventable

January 7, 2010 | 11:47 pm | |

David Leonhardt had a fantastic front pager in the New York Times yesterday that was such a compelling read, I re-read it to try and absorb anything I missed the first time. The article Fed Missed This Bubble. Will It See a New One? looked at the case made by the Fed to enhance its regulatory power.

David asks the question for the Fed:

If only we’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 “not enough in our judgment to raise major concerns.” In 2005, Mr. Bernanke — then a Bush administration official — said a housing bubble was “a pretty unlikely possibility.” As late as May 2007, he said that Fed officials “do not expect significant spillovers from the subprime market to the rest of the economy.”

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.

David concludes:

Which is why it is likely to happen again.

What’s missing from the debate over financial re-regulation is a serious discussion of how to reduce the odds that the Fed — however much authority it has — will listen to the echo chamber when the next bubble comes along.

Exactly.

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.

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[The Housing Helix Podcast] Ben Jones, Founder, The Housing Bubble Blog

January 6, 2010 | 1:11 pm | | Podcasts |

In this podcast I get to speak with Ben Jones, founder of The Housing Bubble Blog. With a background in business, economics, and accounting, he’s been a prolific blogger/analyst of the housing bubble and crash since late 2004 and is considered the go to reference source for bubble conversation. His site continues to draw a rabid readership who come there to lurk, exchange ideas, vent, call out spin and identify those in the real estate industrial complex.

In 2009, Mr. Jones was recognized by Inman News as one of the 50 most-influential people online in real estate. He also owns a property preservation, management, and investment company in Northern Arizona.

Check out the podcast

The Housing Helix Podcast Interview List

You can subscribe on iTunes or simply listen to the podcast on my other blog The Housing Helix.


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[Interview] Ben Jones, Founder, The Housing Bubble Blog

January 6, 2010 | 11:30 am | | Podcasts |

Read More

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[Housing Bubble Golden Rule -> 3 R’s] Regulating, Rates and Recession

January 6, 2010 | 12:24 am | |

In Bernanke’s speech to the American Economic Association on Sunday he suggested that it was regulatory failure, not keeping rates too low for too long, which caused the housing bubble.

Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ 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.

Actions Taken Too late

Mr. Bernanke has pointed to the Fed’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 Fed’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, “these efforts came too late or were insufficient to stop the decline in underwriting standards and effectively constrain the housing bubble.”

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).


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[Commercial Grade] Stuyvesant Town/Peter Cooper Village Rent Decontrol Ruling Explained

December 17, 2009 | 1:29 am |

One of the mysteries of the recent credit boom was the way very smart people made decisions that they now regret. Hugh Kelly and I in our latest podcast agreed that “you do the math” simply wasn’t enough. Knowledge of rent regulation intentions was imperative.

Rental office site for Stuyvesant Town/Peter Cooper Village

One of the largest examples of the credit disconnect and the moment I realized the credit bubble had peaked was the moment I heard that the price paid for Stuyvesant Town/Peter Cooper Village was $5.4B a few years ago.

A recent ruling on rents may have been the last straw.

My commercial partner John Cicero in our Miller Cicero commercial valuation concern lays this out plain as day in his Commercial Grade blog extolling the virtues of an excellent white paper by Barbara Byrne Denham, Chief Economist of Eastern Consolidated Properties.

Here’s a great blog on the building complex.


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[Over Coffee] Quote: Our man Jonathan Miller drops the truth bomb

November 15, 2009 | 11:25 pm | |

In reference to my New York Times quote this weekend by Vivian Toy – Bidding Wars Resume:

Jonathan J. Miller, the president of the appraisal firm Miller Samuel, estimated that two-thirds of the roughly 4,000 [8,389] apartments for sale in Manhattan are priced too high for the current market.

“So,” Mr. Miller said, “you have this weird situation right now where you have above-average inventory, but people are fighting over the ones that are priced correctly.”

(I’m not sure where the 4,000 number came from because Manhattan 3Q 09 showed 8,389 but the specific amount is irrelevant.)

The difference between a bidding war of two years ago and the current market is the irrational nature of bidding wars back then – it was all about “winning.” The market today is about obtaining value – with prices having fallen an average of 25% since pre-Lehman.

Also, there is a larger disconnect between buyers and sellers than a few years ago as measured by the lower pace of sales. There was a reprieve this summer when sales surged, but listing inventory is still above average levels and a higher level of listings are priced above market level leaving purchasers fighting over a smaller selection.

Although this is anecdotal, I do believe that there are fewer bidding wars that occur above list price than we saw a few years ago.

When my friend and bigger than macro Big Picture blogger Barry Ritholtz refers to me as “Our man Jonathan Miller drops the truth bomb” I am confident I nailed the current state of bidding wars.



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3Q 2009 Philadelphia Housing Recovery Sputters

October 28, 2009 | 12:20 am |

This quarterly market report is provided by Dr. Kevin Gillen, an economist and Research Fellow at the University of Pennsylvania’s Institute for Urban Research. He analyzes the Philadelphia real estate market using the city’s real estate database through Econsult, an economics consulting firm based in Philadelphia PA that provides statistical & econometric analysis in support of litigation as well as business and public policy decision-makers. His results are published in a research paper called Philadelphia House Price Indices each quarter as a public service to the Philadelphia real estate community. Here’s his methodology.

Kevin does a great job parsing out the market and it is a pleasure to share his results on Matrix —Jonathan Miller

Download the report and Kevin’s commentary.

Here’s his recent press coverage on the findings.

The most recent home sales figures suggest a slowing in the momentum of the housing market’s attempt to recover from its current slump.

Following the first quarterly increase in citywide house prices after two years of falling prices, the typical Philadelphia home rose in value by a scant 0.2% on a quality—and seasonally— adjusted basis this past summer, according to the latest analysis by Econsult economist Kevin Gillen. Following on the heels of a robust increase of 6.8% this past spring, Philadelphia house values appear to still be struggling to regain the value they lost over the past two years. With these losses in value netted against these two recent increases, the typical Philadelphia home has lost 8% of its value since the bursting of the national housing bubble over two years ago.

UPDATE: Greater Philadelphia Regional House Price Indices now available.

After experiencing the first increase in region-wide house prices in nearly two years this past spring, the Greater Philadelphia region slowed in the rate of appreciation this past summer. (November 11, 2009)



[Fierce Finance] Of Wall Street Bonuses And Crooked Estates

September 29, 2009 | 4:18 pm |

Discovered a new financial services web site today called Fierce Finance that has some compelling content and a cool name. Here are a couple of the items…

Wall Street bonuses if handled correctly, may not be that controversial.

If banks are not accepting even more in taxpayer funds and are making profits legitimately, I doubt anyone will have a problem with big bonuses.

It will be challenging however after what is anticipated to be fairly large profit reports from a few of the larger financial institutions. That has ramifications for stirring up the Main/Wall Street debate, compensation restrictions by Congress (and fanning the flames of housing demand in the NYC metro area).

And a slide show of the more “infamous” properties that were tainted in controversy in the past year.

Between the SEC’s post-Madoff hyper vigilance and the intense media coverage of the financial services industry, a great deal of scandal has surfaced over the last year.

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[NY Times Real Estate Cover Story] New York Appraisals Get Shortchanged

September 26, 2009 | 3:24 pm | | Articles |

It is nice to see the appraisal process move front and center after being on the back burner for the past 7 years during the credit bubble. The appraisal process in mortgage lending is like politics and making sausage – its not pretty when you look at it up close (except for my photo, of course).

Vivian Toy pens a great article which talks about the disconnect between the ideals of the appraisal profession and what is being forced on the profession by the lending community and regulators in this weekend’s real estate section cover story called New York Appraisals Get Shortchanged.

And without a stockpile of comparable sales for reference, Mr. Miller said, “you have to really know the local market, so you can go beyond the raw sales data and use all the subjective factors you can to really tell the story about a property.”

Here’s a key issue affecting all mortgage lending nationwide: APPRAISAL MANAGEMENT COMPANIES (all caps for emphasis beyond using bold).

The potential pitfalls are not exclusive to New York. “The least qualified and least experienced people are doing appraisals across the country,” said Jim Amorin, the president of the Appraisal Institute, a national trade group that represents 26,000 appraisers. He estimated that appraisal management companies now handle about 90 percent of the appraisal market, up from about 30 percent before May 1.

Mr. Amorin said he had heard of appraisers in California who travel 150 to 200 miles to do an appraisal.

It’s hard to believe that they could still be in their geographically competent area, he said. And in Manhattan it would be even harder if you have someone coming in from the suburbs, since things can be vastly different from one side of the street to another.

When you commoditize the appraisal profession as appraisal management companies do, you really get poor quality at a higher cost. The costs are measured in risk exposure, lost revenue from killing transactions that shouldn’t be, and AMC fees are often higher (remember the appraiser only gets about half of the total appraisal fee).

The irony here is that many of the appraisers who were the source of overvaluation during the boom times – cranking out a high volume of reports, mainly for mortgage brokers – are now getting most of the work through appraisal management companies. They are undervaluing because they are unfamiliar with the markets they appraise in and think the lenders want them to be low (they probably do). Remember that in either the high or low scenario, its all about making their clients happy – in other words – insanity continues to be pervasive in mortgage lending…but now it is costing the consumer directly.

The New York Times ran an A1 (page one) story back in August called “In Appraisal Shift, Lenders Gain Power and Critics.” Which talked about how good appraisers are being forced out of business because of the Home Valuation Code of Conduct agreement between NY AG Andrew Cuomo and Fannie Mae. Banks have all the power now and they are showing that they don’t understand the problem at hand.


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[The Stamford Review] Ten Commandments for 21st Century Real Estate Finance

September 17, 2009 | 5:38 pm |

This was taken from the just released issue of The Stamford Review: Housing & The Credit Crisis, a terrific 2x annual publication by Lawrence Sicular. I wrote two articles for the publication three years ago.

One of the pages had a fun list of the Ten Commandments for 21st Century Real Estate Finance sourced to the Counselors of Real Estate Ethics Committee Panelists in October 2008.

Ten Commandments for 21st Century Real Estate Finance

I. Write upon thy heart the law that ‘reward’ and ‘risk’ shalt always appear in the same sentence.

II. Make neither markets nor regulators into idols, and follow not false prophets of simplistic bias.

III. Be sober and watchful, lest the enemy of massive loss approach like a thief in the night.

IV. Honor thy father and thy mother’s ancient counsel; keep it simple, stupid!

V. If thou wilt not do thy own credit analysis, then vow to invest not at all.

VI. Thou shalt not adulterate thy portfolio with excessive leverage.

VII. Thou shalt not bear the false witness of hidden assumptions in thy investment underwriting.

VIII. Thou shalt not covet for the short term, yea, but shalt lay up thy treasures for length of days.

IX. In all things, yield not to the tempter’s snare of panic.

X. Remember that, after thy exile in the wilderness, if thou heedest these commandments, thou shalt once again return to the land of milk and honey.



[Westwood Capital] Only 16.9% To Fall, Land Bubbles

August 25, 2009 | 12:21 pm |

Westwood Capital, LLC, an investment bank, led by founder and managing partner Dan Alpert, projected that housing prices would decline by 28.2% from peak based on the Case-Shiller Index as a benchmark. Arguably pessimistic at the time, the 43% decline that actually occurred was a lot more bleak.

Westwood just released a compelling research piece called Reconstructing American Home Values which suggests we are 75% of the way through the decline.

Here’s a few of the salient points presented:

To firmly return to the upper limits of historically justifiable levels of stabile prices relative to rents in particular, we believe the Case-Shiller 20 markets must decline, on average (with considerable differences among markets), by an additional +/-16.9% from May 2009 levels.

In the final years of the housing mania of the 2000s, home buyers not only assumed the price they paid would rise to the moon; they paid more than 50% of their homes’ purchase price toward what was effectively a wildly overpriced option on that presumed growth, relative to the portion that could be reasonably attributed to the cost of shelter. They not only massively overpaid that option; they were also leveraging themselves to the teeth to do so. For the entire period from 1997 through the bubble’s peak in 2006, housing prices in the Case-Shiller 20 metropolitan statistical areas rose by a total of 163.8% before inflation, and 107.6% after inflation is taken into consideration!

In other words, in addition to the cost of shelter, the housing bubble was caused by an irrational jump in the cost of an option to purchase a property’s future price appreciation. The report concludes that that the future appreciation portion of the value equation was over valued by at least 50%.

Another point that was brought up related to the fact that the value of land is attributable to what it can be used for. When housing markets rise, it is really the value of the land that rises rather than the value of the improvements.

I also like the discussion on rent v. sales price disconnect that began in 1997.

A big concern going forward is rent deflation, which is already occuring as many “For Sale” properties are becoming rentals due to the lack of demand.

Here are a few of the charts that interest me from the report:


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