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Superstar Cities: Inelastic Supply Of Land, No Substitutes

August 8, 2006 | 6:42 am | |

In Peter Coy’s San Francisco, Boston, and Other ‘Superstar Cities’ [BW] he discusses the paper Superstar Cities [pdf] written by Joseph Gyourko and Todd Sinai of Penn and Christopher Mayer of Columbia.

[Academia is getting hip: using ‘Superstar’ in the title was bound to attract attention to the work.]

The purpose of the paper (missing an abstract) is to explain why certain US cities have experienced rising housing prices that have outpaced the remainder of the country. The Businessweek post cites the old explanations for this phenomenon as better amenities and higher worker productivity. Real housing prices tripled over the past 60 years yet, these Superstar cities experienced much more significant appreciation.

They sum it up this way:

Living in a superstar city is like owning a scarce luxury good.

A superstar city is defined as having: a limited supply of places in which to live, and in the face of increasing demand exhibits rising prices. More importantly, a superstar city is unique enough that there is no close substitute city, thus keeping the supply inelastic. A superstar city is not necessarily everyone’s top choice of a place to live, but it is preferred by some people, and it cannot be easily replicated to satisfy their demand. The more people that prefer the city, the more expensive it will become relative to others.

The paper doesn’t really define what causes the demand but the phenomenon is occuring on the east and west coasts where land is scarce. The gap between the rich and not so rich could expand as population growth places additional pressure on the fixed supply of land ’cause they ain’t making that anymore.

Note: This paper seems to be related to another paper co-written by one of the authors Joseph Gyourko called Why is Manhattan So Expensive? Regulation and the Rise in House Prices [pdf] which specifically tied housing price increases in Manhattan (using some of my data) to regulation. In other words, in addition to scarcity of land, other restrictions such as zoning have kept prices high.


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Sense of Direction: GDP Easing, Housing Cooling and The Rise Of Lawn Indicators

August 1, 2006 | 9:45 am | |

There are some signs that business is trying to pass along other costs to the consumer. Core inflation is up. With mortgage rates up since the first of the year, that leaves less room for a mortgage payment. And that is what has tempered demand – this is no new news to anyone, really. Yet there seems to be a sense of optimism that things will work out, without widespread carnage.

It would seem that the Fed has overestimated the willingness of business to take the baton from the consumer. Profits and cash are better but business is not spending with wanton abandon like consumers did.

Here’s a bunch of varying commentary concerning the housing market and overall economic conditions. Its fair to say that the pace of housing sales is declining and the economic conditions are slowing, the government keeps revising its initial housing stat releases downward, but beyond that, the devil is in the details.

In Caroline Baum’s opinion column this week Fed May Get What It Bargained for — and More [Bloomberg]. The Fed by instituting a 425 basis point increase to the federal funds rate since June 2004, is beginning to reap the rewards of its efforts. The economy is cooling. One of the primary reasons for the cooling has been the housing market, but also consumer spending on durables, investment in equipment and software.

That wasn’t the new or most important news last week, however. The Bureau of Economic Analysis also reported that real gross domestic product grew 2.5 percent in the second quarter, down from 5.6 percent in the first.

That surprised analysts who were expecting 3% annual growth.

In Fed’s the grand scheme of things, the burden of economic growth was supposed to pass from the consumer to business. But that does not appear to be happening.

However, despite a slowdown in GDP, core inflation (excluding food and energy) rose to an 11-year high in June [MW] which keeps the pressure on the Fed to keep raising rates.

While consensus seems to be 50/50 for the Fed to pause in August, I believe that its going to be one and done. I believe the fed overshoots by about 2 rate movements as it relates to housing. Possible rate reductions in 2007 are on the horizon. I wouldn’t get too excited since the damage has already been done to the housing market.

In Kenneth R. Harney’s The Nation’s Housing column this week Decoding Fed Speak On the Market’s Path [WaPo] he interviews David Berson, chief economist for Fannie Mae who also has his own column.

In reference to housing, Mr. Berson says:

One of the few immutable laws of economics is that “unsustainable trends eventually come to an end.” And the end of the trend is pretty much where we are right now in housing.

Ben S. Bernanke, chairman of the Federal Reserve, was more opaque. In congressional testimony last week, Bernanke said, “The downturn in the housing market so far appears to be orderly.”

In Berson’s Weekly Commentary column [Fannie Mae] this week, he writes:

Even with the declines in housing activity, and our forecast of an 8 to 10 percent decrease in home sales, we are still projecting that 2006 will be the third strongest year on record for home sales. We expect waning investor demand to drive most of the decline in housing activity, but the fall will be cushioned by strong demographics.

Remember last month when the Census Bureau reported that new home sales increased by 4.6% in May that confused us all? That number was revised down to a 0.5% in the latest release. The lesson: _don’t rely on new home sales data when first released (if at all).

In Toddie Gutner’s Housing Prices Stronger Than You Think [BW] she cites an incredibly optimistic housing report that she deemed refreshing because everyone else is pessimistic. (However, refreshing needs to have some basis of logic. – love the comments to her post.)

For extreme pessimists, there is something for everyone this week. In Rick Ackerman’s “For Sale” Signs Will Trip Crash [Goldseek], he observes a silent crash in real estate. If you want to pull out all the stops and cram as much gloom and doom into one column, then this is the one.

Although prices have yet to sink, except in such formerly white-hot markets as Miami and Las Vegas, the mushrooming inventory of unsold homes nationally implies that a broad and precipitous decline is gathering strength. For the time being, though, we can expect a growing number of homes to sit on the market for longer and longer until either of two things happens: sellers lower their prices, or buyers raise their bids.

Actually, it won’t be a splat that causes sellers to panic, but rather a certain, unpredictable threshold at which “for sale” signs on neighbors’ lawns become sufficiently numerous to induce a cold sweat.


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Oh, That Boring Housing Bubble

July 25, 2006 | 10:24 am | |

The Business & Media Institute observes in their article Housing Bubble, What Housing Bubble? CNN says Bernanke’s comments about orderly decline in home sales are ‘boring’ [Bus Med].

Instead of worrying about the burst of the “housing bubble” you might as well watch paint dry or your grass grow. CNN’s “American Morning” is no longer forecasting doom and gloom for the US housing market. On July 21 Gerri Willis declared the latest housing market news “kinda boring.”

Back in March 2006, CNN reported:

If you are worried about the housing bubble bursting, sell, sell, sell, it’s a sellers market.

Bernanke testified before the Senate Banking Committee [Reuters] last week and failed to use the phrase housing bubble. Rather, he said that the housing downturn appeared orderly [BW].

In addition [Bloomberg]:

Bernanke forecast slower economic growth and an easing of inflation, which a government report this week showed rose for a sixth consecutive month. In his testimony, the chairman, 52, signaled he’s open to suspending the Fed’s two-year campaign to increase rates; minutes of the Fed’s June policy meeting released yesterday showed officials unsure of their next move.

It looks like the housing bubble discussion has moved to the back burner. If its not an exciting activity where records are being broken or tragedy strikes, then readership of real estate articles will likely diminish over the next year.


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Mortgage Rates: Peaking Our Curiousity? Or Simply Peaking at 7%?

July 12, 2006 | 8:59 am | |

Mortgage rates are expected to be relatively stable over the remainder of the year [SacBee] despite the 17th rate increase by the Fed.

Interest rates for fixed, 30-year home loans are likely to remain below 7 percent through 2006, a positive indicator for homebuyers in slowing markets like Sacramento, federal mortgage giant Freddie Mac said Monday.

Freddie Mac is the nickname for The Federal Home Loan Mortgage Corp., established by Congress in 1970, buys residential mortgages from private lenders to replenish the supply of home loan money available nationally.

Freddie Mac said it expects 30-year mortgage rates to average 6.8 percent for the remainder of 2006 [CNN] as the rate of GDP expansion and inflation weakens in 2007.

Freddie Mac predicts that rates will not reach 7% until mid-2007. On one side this is good news but since 70% of recent home purchases were financed with ARM’s, many are feeling the pain right now.

Since mortgage rates were the catalyst for the housing boom, mortgage rates are determining our near term economic health. There is some rising consensus that the Fed is already overshooting economic needs and things are actually worse than they appear [Bloomberg]. Its anticipated that at least one more increase is in store for us in August before they take a break.

When the pace of mortgage rates cool, thats a sign that the economy is weakening. Its not being done as a favor to home buyers.



[In The Media] On The Economy: Bloomberg TV clip for 7-6-06

July 7, 2006 | 5:20 am | | Public |

Here is a clip of my appearance on the Bloomberg Television show On The Economy. I spoke about the recent release of my company’s 2Q 2006 Manhattan market study. [about 5 minutes]

The quarterly market report pretty much absorbs two weeks of my time before release. It will be good to get back to more postings on Matrix!

Of course, the folks at Sellsius had a better image of me.


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[Media Chain-links] 2Q 2006 Manhattan Market Overview

July 6, 2006 | 6:07 am | | Public |

The 2Q 2006 Manhattan Market Overview that my appraisal firm, Miller Samuel, prepares for Prudential Douglas Elliman, was released today. Each quarter I place links throughout the day of publication to make it easy to compare how each media outlet (big and small media, blogs) presents the exact same set of data.

Even more interesting to me is how the other real estate brokerage companies who write alternative reports, frame their comments in the articles. While I have not had access to their specific results, I understand that some of the statistics such as average sales price, differed from the results in our report. Some of the reporters that cover the real estate market in New York have expressed frustration at trying to discern what actually happened this quarter.

To view the actual data and charts (going live by noon Friday 7-7-07). The actual report pdf will be available next week.

This list is in no particular order and were generally presented when I found them. I included some of the duplicate news feeds because I found it interesting who picked up the story. I will keep adding to the list through the remainder of the week.


Little Shift in Prices of Manhattan Apartments [NYT]
Manhattan Has Most Apartments for Sale Since 1994, Report Says [Bloomberg]
Mixed messages on Manhattan home prices [CNN/Money]
Manhattan apt. price hits record [NY Daily News]
Disparities in Manhattan apartment prices show a market that is neither booming nor busting [NY Newsday]
Condo Expectations May Be Rethought As Prices Plunge [NY Sun]
Manhattan apartment prices leap despite sales drop [Reuters]
Manhattan real estate inventory grows [Inman]
NYC Housing Prices Keep Climbing [TheStreet.com]
Manhattan condos again outsell co-ops [The Real Deal]
Sales drop, prices rise in Manhattan market [The Real Deal]
2nd Quarter 2006: “The Boom is Done” [The Real Estate]
Manhattan housing prices up [USAToday (Miller Samuel)]
Brokerages Submit Reports, Hope to Avoid Summer School [Curbed]
Manhattan Apartment Price Hits Record Highs [All Headline News]
Investing: Rising rates depress N.Y. apartment sales [IHT]

_Duplicate News Feeds_
Sales mellow in Manhattan [Houston Chronicle]
Manhattan apartment prices leap despite sales drop [Yahoo News]
Manhattan has most apartments for sale since 1994 [The Journal News (Westchester, NY)]
Manhattan apartment prices leap despite sales drop [Washington Post]
Sales of Manhattan apartments falling [Sun-Sentinel]
Apartments On The Market In Manhattan Hit 12-Year High [Tampa Tribune]
Manhattan apartment prices leap despite sales drop [MSN Money]
Manhattan apartment prices leap despite sales drop [7KPLC (Lake Charles, Louisiana)]
Manhattan apartment prices leap despite sales drop [Wave3 (Louisville, Kentucky)]

Here are a handful of radio and tv spots as well – more to come.


[Bloomberg TV]

[WPIX WB11]

Morning Call [Bloomberg TV]

Bloomberg Morning Markets [Bloomberg TV]

Squawk Box [CNBC]

News at Ten [WB11]

News at 5 [Fox 5]

WSJ Report [WCBS Radio]
NPR poor fidelity – better clip coming [WNYC]


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[List-o-links] Housing: Tipping Point For Fed?

June 28, 2006 | 7:13 am | |

Here’s a list of articles discussing the Federal Reserve’s rate move tomorrow at the close of the 2-day Federal Open Market Committee meeting. Oil-based inflation concerns have kept the pressure on the FOMC to keep raising rates.

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The Blip: Housing Starts Up, Building Permitting

June 21, 2006 | 12:01 am | |

The Commerce Department released their new-home construction stats which showed a 5% increase in May over April, but starts are still 3.8% below last year. Building permits were 8.5% below last year’s pace.

Total housing starts rebounded from a 13-month low to increase 5.0 percent in May as builders worked down a backlog of unfilled orders under unusually good weather conditions. Issuance of new building permits fell by 2.1 percent, continuing the moderate downslide from the peak last September.

Download the press release [pdf]
View regional charts [macroblog].

There is some concern that too much good news will prompt the Fed to take stronger inflationary measures [WaPo] than it has in the past.

However, this news didn’t strike me as particularly good. Is it really inflationary to have housing starts rise as sales are slowing and inventory is rising? That doesn’t make a lot of sense to me.

I think the rise in new home construction is really blip and not the beginning of a trend [NYT].

Economists had expected the rate of construction on new homes to increase only marginally from April to May, according to a survey by Bloomberg News. So the latest figures were somewhat surprisingly strong.

“After three months of large single-digit declines, a rebound was to be expected,” Goldman Sachs economists wrote in a research report today. “The one we got was larger than expected, but certainly not enough to overturn the idea that housing is in a contraction.”

If the Fed interprets this to mean the economy is inflationary, then housing will suffer further with more rate increases. This rise really shows that more housing is being produced during a period of rising inventory and falling demand.

In other words, this isn’t a sign of anything positive.


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Post-Memorial Day Weekend, Things I Didn’t Have Time To Grill List-o-Links

May 30, 2006 | 12:01 am | |

Source: NYT from “Pimp My Grill”


I’m so exhausted from all the eating and activities afforded me this weekend that I need to go to work to rest up. Here’s a smattering of links I didn’t do anything with. Enjoy:


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This Just In From The Census Bureau: New Home Sales Stats Tell Us Absolutely Nothing

May 25, 2006 | 12:01 am | |

Every month the Census Bureau and HUD release stats on new residential one family home sales. This month the abstract from the release was as follows:

Sales of new one-family houses in April 2006 were at a seasonally adjusted annual rate of 1,198,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 4.9 percent (±11.5%)* above the revised March rate of 1,142,000, but is 5.7 percent (±9.8%)* below the revised April 2005 estimate of 1,270,000. The median sales price of new houses sold in April 2006 was $238,500; the average sales price was $298,300. The seasonally adjusted estimate of new houses for sale at the end of April was 565,000. This represents a supply of 5.8 months at the current sales rate.

Download the full release [pdf].

Listen to Professor Robert Shiller discuss the current real estate market. [see audio section – Bloomberg]

Economists were projecting a 6% decline from March to April but the final stats showed a 4.9% increase [Bloomberg], sending bond yields up today over inflation concerns.

But here’s why these stats from Census are essentially meaningless. Apparently I am not alone on this.

  • The historical data is constantly revised (significantly) – Amazingly, the prior 5 months of data was just revised [BW] and while the number of homes available grew 27% over the prior year and prices were up 1%.

  • The margin of error is greater than the stat – According to the press release, the 4.9% increase is actually somewhere between 16.4% above to 6.6% [Lanser OCR] below the revised March rate of 1,142,000, but is somewhere between 15.5% below to 4.1% above the revised April 2005 estimate of 1,270,000.

  • It doesn’t consider the breakdown of investor unitsHow many of the new home sales [TMR] are classified as second homes or investment properties? A deeper look into the numbers reveals that the South and West regions represented 960,000, or 80.1%, of the new homes on which paper was written. These regions host more than a few retirees, snowbirds, and also harbor plenty of vacation spots. If the sales figures represent second homes and investments to the home buyers in those regions, then we can infer that there are still plenty of speculators in the market.

  • Its a small data set and it doesn’t apply to local markets – The number of transactions is about one-seventh that of existing home sales. Since these are national stats, they are not appropriate to rely on for local market analysis.


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Subway Train Track Links

May 23, 2006 | 12:01 am | |

Here are some links I found interesting but didn’t have time to write about.



Inflation Is As Inflation Does, But Housing Doesn’t

May 18, 2006 | 8:33 pm | |

Investors, real estate investors and consumers have all been scratching their heads lately. Everyone is looking at short-term inflation pressures and contradictions in data and wondering what affect that will have on the Fed’s next move.

Yesterday, the stock markets dropped sharply [NYT] in response to new concerns about inflation as consumer prices increased. Wholesale inflation rose at a brisk pace in April [DFP], pushed up by rising energy costs, as factory output rose and homebuilding slowed.

Just two days ago, a falling dollar and weakening housing market suggested the Fed might pause and not raise rates at the next FOMC meeting [Bloomberg] causing worries high commodity prices could slow the global economy. Oil prices have trended downward recently [Forbes]. Core inflation was tame, posting a 0.1% increase in April and lower than expected and housing starts dropped 7.4% last month and down 20% since January.

So which is it? Depending on the report you read, inflation is looming or it isn’t. The Fed will continue their policy of measured increases or they won’t.

The Fed has basically postioned itself to wait an see what the data tells them between now and the next FOMC meeting. So we get day to day changes in the interpretation of the state of inflation. The uncertainty of whether mortgage rates will continue to rise places further pressure on the housing market.

The mixed economic reports [AR] should give the Fed a lot to think about.

The stock market seemed to show belief that inflation was not built into pricing yet. Even the zen-god of the bond market, Bill Gross of PIMCO changed his forecast [Globe].

Bill Gross, the world’s most influential bond fund manager, raised his forecast for benchmark ten-year bond rates Wednesday, admitting he underestimated the strength of the global economy.

The takeaway from this economic stat chaos is that despite stronger consumer pricing, housing market participants are unsettled. It would seem to me that the impact of a weakening housing market has not impacted inflation data yet.

The economic repercussions of a weakening housing market is a significant economic unknown and additional rate increases will expose further weaknesses, compounding the problems. I remained concerned that inflation is more of a catalyst for a slowdown (in a weird twisted way) rather than a long term condition of an over heated economy.

Cart before the horse.


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