Matrix Blog

Brokers, Agents, MLS, NAR

The Conundrum: A riddle in a mystery in an enigma in a boom

October 13, 2005 | 11:17 am | |

Greenspan’s conundrum has been the fact that [Financial Times] bond yields have remained low. We are expecting to see some upward movement as more inflationary data comes out over the next few months.

Two sides are presented as to why the bond market yields have remained low, which has extended the housing boom and has been counter to historical patterns:

Why is the bond market right? Investors are buying bond yields at low rates because they believe the economy will slip. A flat yield curve often pre-dates a recession. Also, the bond market is not concerned about growth right now, only inflation. With central banks keeping rates low as well as heated competition from Asia. Also, demographics may be keeping yields low. The 25-44 year old age group is shrinking so consumption growth should shrink as well keep rates low in the long term.

Why is the bond market wrong? A recession is not in the forecast and the equity (stock) markets are not worried about one. Also, there may be a global savings surplus – and we hear this a lot – there is so much capital out there, seeking out limited opportunities for investment. A potential revaluation in the Yuan, high US budget deficit and further inflationary economic data would cause yields to re-adjust to proper levels. There was an article today in the Wall Street Journal that suggests that global inflation may return.

The sharp rise in energy costs and economic damage caused by the 2 recent hurricanes has added to the pressure.

In other words, no one really knows what the long term outlook is for bond yields. Yet it is critical to the housing market since mortgage rates are usually tied to bond yields.

On the other hand, the NAR’s Home Sales Forecast is rising [RisMedia]

[NAR’s 10-2005 US Economic Outlook] [PDF]


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Losing The Wealth Effect Is No Orgy And No Picnic

October 9, 2005 | 10:45 pm |

When the housing boom is described as an orgy by respected media outlets, then its time for concern.

[NYT] A Mixed Message: Has it finally arrived, the end of Manhattan’s real estate orgy, the autumn of our discontent?

[Newsweek] So Long to the Wealth Effect?: Whatever the root causes of the immense gains from real estate and the stock market, the result has been a marathon shopping orgy.

Over the past twenty years, consumers have become largely dependent on the flexibility to withdraw from their home equity accounts to supplement disposable personal income. In 1980, consumer spending was 63% of gross domestic product and today it is 70%.

The wealth effect [Matrix] has diminished for the stock market and may happen with housing, depending on where the economy goes over the next year and how the housing market reacts over the next several quarters.

There is now additional risk to consumers. Higher mortgage and home equity rates, higher energy costs and weaker gains in wealth may create problems for consumers, and because of dependency on consumer spending habits, more problems for the overall economy may be on the way. No orgy here.

The alternative sounds less like an orgy and more like a rained-out family picnic. We may see what Great Britain saw two years ago as their housing market peaked. Interest rates were raised to stem inflation and consumer spending dropped, but no recession occurred.



Manhattan After The Hoopla Over A 12.7% Drop: What Really Happened In 3Q 05?

October 9, 2005 | 9:05 am | | Milestones |

After the release of our 3rd quarter Prudential Douglas Elliman Manhattan Market Overview last Tuesday to the media and the frenzy of coverage during the week as a result, the New York Times ran an excellent overview of the market story this weekend called A Mixed Message [NYT].

Since then, I have received many inquiries about the state of the market over the week from real estate brokers, wall street firms and lenders to interpret the statistics in the report that were played over and over in the media firestorm. Whats been fascinating about this whole experience is how much coverage was given to the average sales price statistic, which could not stand on its own without explanation. Hopefully I don’t sound too cynical but this stat was likely used because it showed the most negative result.

Here’s a quick list of the highlights of the current market that are most useful:

  • The average price per square foot set an all-time record reaching $984 per square foot and rising 1.4% from the prior quarter. This is the telling statistic. The overall market increased this quarter, but not at the same torrid pace as before. The rate of appreciation has eased. In fact, since larger apartments generally sell for more on a per square foot basis than smaller apartments, one could make the argument that the shift in unit mix also tempered this indicator as well.
  • There was a significant shift in the mix of apartments that were sold. The average sales price dropped 12.7% because the market share of entry-level apartments (studio and 1-bedrooms) spiked 5% and activity at the upper end dropped off.
  • Entry-level sales surged because of concerns over modest increases in mortgage rates are expected. Of course, this has been the speculation since mid 2003 but this time, with rising fuel prices, comments from the Federal Reserve about housing, mortgage rates may actually rise.
  • High end sales activity eased rather than prices dropped. The luxury market average sales price dropped 26% from last quarter because fewer sales at the upper end occurred. There were 17 sales at or above $10M in the 2nd quarter and only 4 sales at or above $10M tracked in the 3rd quarter. In fact, a high end broker contacted me to say there were 5 such sales this quarter, but didn’t realize that one of them closed in the prior quarter. Nevertheless, whether 4 or 5, the sales activity was well below 17 sales. This doesn’t indicate that prices collapsed, but that a shift in the mix of apartments that sold in the upper 10% of the market.
  • Inventory did increase this quarter and was more heavily weighted with condos than co-ops. Since inventory came on at generally the same pace as the number of sales eased, inventory built up. This was attributable to seasonal considerations (thats a stretch) and bad economic news, rising gasoline prices, over saturation of bubble speak for the past 6 months and negative economic news relating to the 2 hurricanes.
  • There are expectations of record Wall Street bonuses at yearend due to the solid year seen by investment bankers and a number of other sectors in the financial district. Historically, Wall Street bonus income has flowed through the real estate economy after the New Year.

Here are a handful of all the interviews I did which basically re-iterate most of these points.


[Focus on Business (Canada)]


[Bloomberg Television]


[WCBS Channel 2]


[WNYC Radio (Brian Leher Show)]


[WNYC Radio]


[Bloomberg Radio]


[WCBS Radio]


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Flipping (Is) Out, In The Big Apple

October 3, 2005 | 9:27 pm | |

The New York Times asked my appraisal firm, Miller Samuel to research the “flipping” phenomenon in Manhattan, which is noted for its high housing prices and dominance of co-ops. So much has been written about real estate speculation over the past several months in other markets like Florida but no one has quantified the phenomenon in Manhattan.

The idea here is that a real estate market with rampant flipping (we define a flip as re-selling a property within 18 months) as a danger sign for future price volatility. A market based on flips is ultimately doomed, like a fee simple ponzi scheme with a foggy end point. In fact, developers in Miami encourage flips and have sales agents in place (for a 2nd commission on the same property) to sell your unit for you. Easy money.

Our study, as noted in the New York Times article on October 2, 2005, determined that property flips, after controlling for typical moves like job transfers or changes in income, was about 3% of all sales activity, far less than the national average of 23% compiled by the NAR. [Matrix].

When electricians and health care workers are quitting solid secure jobs to flip real estate, then its time to get out. Fortunately, this is not happening in Manhattan.

So in some respects, one could consider that high housing prices and difficulties with co-ops in Manhattan, actually makes the housing market there less volatile.


NAR: So What Else Is New? Existing Home Sales Prices And Volume Increase In August

September 26, 2005 | 11:50 am | |

ladders Approximately 85% all residential home sales are existing homes. The large sample size makes the monthly NAR report representative of the country’s housing market as a whole than then new home sale stats released by the US Commerce Department tomorrow. However, existing home sales are based on closings so it lags the current market while new home sales are measured at time of contract.

The housing market has been the main driver of the U.S. economy this decade, accounting for 50 percent of the overall growth and more than half of the private payroll jobs created since 2001, Merrill Lynch said in a report on Aug. 15.

Today the NAR released their existing home sale statistics for August and the sesults were quite robust [Bloomberg]. The number of sales for August increased 2% over the prior month and 7.8% over the prior year suggesting that the rate of existing home sales has increased this summer.

The median sales price of of a US existing home was $220,000, a record. It was up 15.8% from the prior year.

The NAR expects housing demand to continue to increase due to the Hurricane Katrina. The cleanup will provide a drag on the economy keeping mortgage rates low, the primary driver of the current high level of sales volume. Steady job creation, easy access to financing have kept demand high.

The results were somewhat of surprise given the traditionally slow summer months and the concerned positioning the Fed has taken on the housing market this summer. However, these statistics do not reflect the August market due to the delay between contract and closing date.

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G’Data! Australians Unhappy With Their Housing Data, The US Doesn’t Seem To Be

September 24, 2005 | 8:28 am | |

In Australia, flawed housing data draws some concerns over their monetary policy thinking [The Australian]. The Reserve Bank of Australia (RBA is the US equivalent of the Federal Reserve Bank) has been increasingly vocal over the past few years over the quality of housing statistics. “Most of the available price information from real estate agents, banks, the various organisations that monitor house prices and the Australian Bureau of Statistics is flawed to some degree.”

Aside: the housing peak in Sydney was in 2003 and the market has fallen 7% in nominal terms over the past 18 months.

The concerns raised by the RBA are the timeliness of the information, changes in the mix of housing being sold (ie, large, small, etc.) and quality and size of the housing being constructed.

Same issues in the US

We have similar issues with the housing data available here. Census data is delayed. We rely on NAR for a large portion of the statistics but they are an industry trade group – by definition has a bias, and the data is generally lumped together not reflective of changes in housing mix.

The Federal Reserve does not appear to be displeased with the US data available to the public. Are they looking at something else?

Saw a great quote published in a recent issue of The Economist in an article on the accuracy of scientific research papers that may be appropriate when applied here:

Theodore Sturgeon, An American science-fiction writer, once observed that “95% of everything is crap”. John Ioannidis, a Greek epidemioligist, would not go that far. His benchmark is 50%.

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The Fabulous, Gracious Language Of BrokerSpeak Used To Be Triple Mint

September 17, 2005 | 7:20 pm | |

Over the past 20 years, real estate brokerage has evolved from a part time, to a full time profession. Many accomplished professionals from other industries have switched careers to fill the ranks. As buyers and sellers have become more sophisticated having access to more information, the brokerage profession has worked hard to keep pace. The sales agents that will succeed in the future will likely embrace changes in the industry.

One of the residuals of the past, now on the decline, is the language of brokerspeak: [“This apartment has the most dramatic bathroom in New York City”]( http://www.newyorkmetro.com/nymetro/realestate/columns/gothamrealestate/5106/). Its the slang of superlatives used to describe property listings. The irony here is that the purchase or sale of a residential property is one of the largest financial transactions in anyone’s life and yet it can be reduced to brokerspeak.

Successful real estate brokers seem to rely less on brokerspeak to sell their listings than in prior years. Brokers still use plenty of superlatives, but hey, they are selling something, so thats ok. The major brokerage firms seem to be paying more attention to this and it shows in their online listings…brokerspeak is on the decline.

How To Classify A Phrase As Brokerspeak
A simple test: try saying the phrase This living room is absolutely sun-drenched to a loved one and not feel awkward.

How To Translate A Phrase From Brokerspeak
See: Reader’s Digest’s Speaking the Real Estate Language: What Brokers Say vs. What They Really Mean.

Favorite Brokerspeak Phrases
Triple Mint and Mint (no Double Mint? perhaps due to Wrigley’s copyright?)
Fabulous (or Fab) Views (An adjective that provides no explanation)
Gracious Living (what is that?)

Low End BrokerSpeak
From the basement of brokerspeak, here is a great post presented as only Curbed.com can.



The Real Estate Brokerage Business: Its Intense

September 15, 2005 | 10:56 pm |

Penn State University completed a 12-market study that looked at patterns of competition in each market between brokerage firms. Some of the highlights:

  • Real estate sales is an intensely competitive business, surprising since the real estate boom was expected to reduce competition.
  • Franchised firms have a larger market share than local firms.
  • No single firm dominates any one market.
  • Sellers are more informed about property values.
  • Consumers are demanding and brokers are providing a wider range of services.
  • No evidence of increases in For Sale By Owner and Discount Brokers.



Length x Width Is Negotiable

September 15, 2005 | 10:42 am | |

In most major commercial office markets, leasing is typically done on a monthly or annual “rent per square foot” basis. So, in order to calculate the total rent all you need to do is multiply the rental rate by the unit size, right? Not so fast. Unit size can change like the weather and tenants are well advised to negotiate not only the rental rate, but the unit size as well.

First, the tenant needs to recognize that there are different types of area measurements. Gross floor area refers to the size of the building envelope, from outside wall to outside wall. Useable area, sometimes known as carpetable area refers to the portion of the floorplate that will actually be used by the tenant. And, rentable area (which, as the name implies, is what the tenant’s rent is based on) refers to the size of the actual tenant suite, including all mechanical rooms, stairwells and elevator shafts, plus an add-on for common areas (for example, a pro-rate portion of the corridor for a multi-tenant floor, and the lobby). The spread between the tenant’s actual useable area and the rentable area can be as much as 30% or more, depending on the efficiency of the building.

Unless the tenant is going to retain his own architect to measure the spacce (unlikely for all the but the largest space users), the rentable area is, simply, whatever the landlord says it is. We saw this first-hand when leasing office space last year. For some strange reason, most of the 5,000 square foot suites we looked at measured 50′ x 90′.

See [Soapbox] Real Estate Taxes: The Size Of Homes Expand And Contract

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Housing : Placing Bigger Bets By Placing Less Down

September 11, 2005 | 11:16 am |

Many homebuyers are being more creative, taking more risks in getting into the housing market. According to SMR Research 38.1% of home buyers put less than 5% of the purchase price down, up from 30.6% in 2000. [USA Today] Piggy back financing, obtaining a line of credit simultaneously with the house purchase to put 20% down to avoid PMI insurance, has also been rising. SMR says 48.2% of buyers used piggy backs up from 19.9% in 2001.

Americans now shoulder record levels of housing debt — more than 8 percent of homeowners spend at least half their income on their mortgage. [Washington Post]

So What?

Well, as more people increase their borrowing risk, foreclosure rates rise.

Foreclosure.com published a list, by state, of foreclosure inventory available for sale in August. [Valuation Review: Pd. Sub.] There was a 3% increase from 90,611 units in 93,440.

Sample media foreclosure coverage from around the country:

Texas Up 6.6% from July to August 2005 [San Antonio Bus Journal]

Massachusetts Up 29% from August to August 2004 [RISMedia]

Georgia Up 4.4% from June to July 2005 [Realtor.org]

See previous post: PMI Gets You In The House: Now Get Rid Of It

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DOJ Sues: NAR Must Let Everyone Join The Party

September 8, 2005 | 10:31 pm |

The Justice Department [DOJ] is suing the National Association of Realtors. [Reuters]

The NAR created a bylaw in 2003 that allowed members to opt out of sharing their listings with online real estate brokerage firms. The DOJ wants the rule struck down because it discourages competition and hurts the consumer. The NAR had been negotiating with the DOJ and had modified the rule but not to DOJ’s satisfaction.[Valuation Review: Paid Subscription]

DOJ states that the original rule:

prevents consumers from receiving the full benefits of competition and threatens to lock in outmoded business models and discourage discounting

and the revised rule still:

discriminated against “brokers who use the Internet to more efficiently and cost-effectively serve home sellers and buyers.”

Besides going after NAR for limiting competition, the DOJ seems to go after the broker business model, saying the rule was forcing the use of a dated business model.

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Mortgage Apps Rise As Rates Fall: Will Home Sales Rise Too?

September 8, 2005 | 12:13 pm | |

With the drop in mortgage rates that started in early August, it comes as no surprise that mortgage applications are now starting to rise

The next thought that comes to mind is whether or not home sales will follow. Sales activity seemed fairly brisk in New York, althought the NAR’s Pending Home Sales Index [Note: PDF] showed modest declines in all regions except the south. The idea here is that contracts are the better indicator of the current state of the real estate market. However, this is more of an informal survey from their members. It is still behind the market since they have only report through mid-July.

With Katrina and higher oil prices, it will be interesting to see what happens in September. I’m thinking good thoughts.

I will probably get a little annoyed if interpretation the the next round of housing data does not consider that August is usually one of the seasonally slowest times of the year for housing sales. Hence the infamous, seasonal adjustment should be applied. See Lies, Damn Lies, And Government Statistics: Part I

One other thought is the idea of using mortgage applications in predicting home sales. There is an interesting article published from the Dallas Fed Can Mortgage Application Help Predict Home Sales?[Note: PDF] Its a bit dry but my sense is that the mortgage app data really lags too much to be an effective predictor of home sales without a lot of tweaking.

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