Saw this is in the most recent edition of New York Times Magazine. Brilliant
To keep the sales going, developers in the massively bloated Chinese housing market are getting more creative. This NY Times short documentary is fantastic and surreal. I’d chalk it up to simply bizarre, if there wasn’t such a desperate undertone to it.
It reminded me of “The Truman Show” movie where everything Jim Carrey’s character saw was fake, made for him. However in the Chinese version, everyone knows it’s fake but embraces it.
With the massive oversupply, no wonder savvy Chinese investors are extracting as much wealth as they can and investing overseas in anticipation of that day of reckoning.
One of the great ironies of modern residential real estate has been the expansion in transparency of information, along with greater secrecy of ownership. I think the latter coincides with the much greater wealth that is being put into hard assets like real estate. Privacy and security are indeed very important to many, including the wealthy and especially those near the top of the financial pyramid. There is nothing sinister or unseemly about the desire for privacy. The use of limited liability corporations (LLCs) has been a legal vehicle (and a gift) from lawmakers who created it that allows people to keep certain transactions hidden from view. However the LLC also provides an opportunity for bad actors to shelter their often ill-gotten assets too.
Louise Story and Stephanie Saul of The New York Times have explored this in “Towers of Secrecy: Stream of Foreign Wealth Flows to Elite New York Real Estate,” an epic data visualization along the lines of “Snow Fall: The Avalanche at Tunnel Creek” This article is a must read covering the hypersensitive subject of high end real estate and privacy.
The ongoing debate about the dying middle class versus the booming fortunes of the wealthy, the lack of affordable housing versus the super-luxury residential tower boom and municipal governments grappling to keep construction and development moving forward to keep tax revenue flows coming in, have made this effort long overdue.
“Towers of Secrecy” is careful not to stereotype users of LLCs in high end real estate transactions as exclusively foreign buyers. Within the Manhattan market, foreign buyers are not the majority of overall high-end real estate purchasers. However they tend to be concentrated around the Midtown central business district (aka ‘Billionaires’ Row’) whereas domestic purchasers tend to favor markets found to the north and south of Midtown.
UPDATE There’s a great recap over on Curbed NY too:
Scandal-Plagued Foreigners Park Millions in Midtown Condos
Here are a few screenshots of the embedded videos within the “Towers of Secrecy” piece.
[click to expand]
A few months ago there was a record $70M sale of a penthouse co-op sale at 960 Fifth Avenue. The purchaser paid $5M over list price.
While doing some research I ran across an article in the New York Times archive that described a record Manhattan sale of $450,000 in the same building in 1927. The apartment was located on the 10th and most of the 11th floor in the same building (aka 3 East 77th Street).
Based on the unit description, I believe this to be Apartment 10/11B which last sold for $21,000,000 on July 24, 2013. Using the BLS calculator for CPI, a $450,000 sales price in 1927 adjusted for inflation to 2014 dollars would be $6,164,043 or an increase of 1,270%.
However the apartment sold for $21,000,000. an increase of 4,567% or 3.6 times the rate of inflation.
There was a good article in the New York Times yesterday: In Many Cities, Rent Is Rising Out of Reach of Middle Class
Many have complained about the Federal Government’s (and our society’s) overselling of homeownership over the past decade and how the decline in homeownership will eventually lead to an emphasis on rentals in the US. Of course, like many housing market ideas, good and bad, they tend to be presented in a vacuum, without real context.
I believe much of this discourse is in reaction to tight credit combined with a weak economy rather than some sort of fundamental cultural and economic shift. During the bubble we got the opposite discourse – that there was a fundamental cultural and economic shift towards homeownership.
Currently there is a much smaller subset of Americans that have access to financing. According to the Federal Reserve Senior Loan Officer Survey, lending has actually tightened in 2014 over 2013 (related to QM). Many homeowners are unable to sell because they can no longer buy and many renters no longer qualify for financing so the idea of of homeownership as a goal fades.
Case in point has been the recent public discourse on the issue of home affordability, whether it be sales or rentals. Zillow presented an analysis for the New York Times that illustrates how much rents have risen in the past 13 years (since 2000) in cities across the US.
Here’s the scenario:
The economy is weak – we are seeing tepid growth in employment, stagnant incomes and historically tight residential mortgage lending.
The organic flow out of the rental market into the sales market is slowed and a log jam is created of too many renters and not enough buyers.
Rising rents against stagnant incomes creates an affordability crisis. The sales and rental markets are connected. They are not mutually exclusive.
Rising rents are a product of tight credit, which is a residual byproduct of the financial crisis. Fix the economy and credit eases, then lending normalizes (no, not circa ’06) and the pressure on rental housing is eased.
I’m not entirely confident with the reliability of the historical rental data being presented to the New York Times by Zillow – but I still agree that affordability is being pressured:
– Zillow was launched circa 2006 and rents are not public record so the early data has to be super thin.
– The comparison was made between a first quarter (low) and a third quarter (high) in a highly seasonal market.
– I am not sure if “New York” means Manhattan or New York City. If it is Manhattan, then our median rent figure in 1Q 2000 was $2,600 in nominal terms, and $4,276 in real terms. In nominal (unadjusted for inflation) terms, rents have risen 23.1% through 3Q 2013 while real median rent has fallen 27.3%. The Zillow median rent as share of median income nearly doubled, rising from 23.7% to 39.5%. Either incomes have collapsed in NYC or the 2000 rental figure being punched into their model is flawed, ie way low, no?
Other inights on any of this would be appreciated.
Back in mid 1980’s the front door of a new condo conversion at One Tompkins Square Park was spray painted with words “Die Yuppie Scum” and it became the battle cry for protests against gentrification of the East Village. With the eastward push of new residential development in the 1980s from the West and Central Village, residents and local businesses worried about being priced out and losing the intangibles that made the neighborhood unique – and that they would disappear along with it.
I remember appraising apartments to the east of Tompkins Square Park, seeing squatters inhabit derelict buildings, observing a burned out school bus on blocks in front of a newly converted walk-up and the self-described “Anarchists” in the park. All that is gone.
Merriam-Webster defines gentrification as:
the process of renewal and rebuilding accompanying the influx of middle-class or affluent people into deteriorating areas that often displaces poorer residents
Philadelphia is one of the first cities to tackle the issue in an attempt to keep the long time residents there and in doing so, helping to minimize the loss of the character of the neighborhood. It is fascinating and encouraging to see city governments be proactive on the issue since it costs money in the short term.
The initiatives, planned or underway in Boston, Philadelphia, Washington, Pittsburgh and other cities, are centered on reducing or freezing property taxes for such homeowners in an effort to promote neighborhood stability, preserve character and provide a dividend of sorts to those who have stayed through years of high crime, population loss and declining property values, officials say.
Here is an interview I recently did for Bloomberg Television’s In The Loop on the first phase of the long awaited and sorely needed Second Avenue subway line. I had also looked at this data about two years ago.
For the show I crunched closed sales data for the 4th Quarter of 2013 versus the same period in 2009 and provided a similar time frame for the rental market. I defined the impacted subway zone as the Upper East Side neighborhood between Third Avenue and First Avenue extending from 96th Street to 59th Street. Areas out side the zone were simply those to the east and west of it but within the neighborhood. I realize that simply taking the average price of all transactions in each of the zones are subject to skew. However given the large size of the zones, I think it is a reasonable way to extract some sort of impact.
Based on the results, the subway zone fell behind the areas outside the zone during the 4 year time span.
West of Zone
Sales Prices +14.7%
Rental Prices +7.7%
East of Zone
Sales Prices +12.2%
Rental Prices +9.1%
What I love about this chart is how Manhattan co-ops dominated the record books through the late 1990s Dot.com boom until condos started to take over. Until then, condos were seen as more utilitarian and less about luxury. Over the past decade, Manhattan condos have generally eclipsed co-ops in the record books.
As a stagnant form of Manhattan housing stock, they ain’t building luxury co-ops like that any more (actually they’re not building them anymore).
I’ve updated this chart through the end of 2013, but it’ll be obsolete fairly quickly with records expected to fall in 2014. At a minimum, anticipated record closings include a few condos and a townhouse.
According the National Association of Realtors, their Pending Home Sales Index fell 5.6% from August to September 2013 (seasonally adjusted), the largest monthly drop since May 2010 after the artificial prop of the 2009-2010 federal homebuyers tax credit expiration caused contracts to drop by nearly 1/3 from bloated levels.
Removing seasonality from the results makes the year-over-year adjustment show nominally 1.1% higher contract volume from September 2013 than in 2012 rather than a 1.2% decline. Still, the results were weak.
Why did pending sales post weaker results?
Weaker conditions prevail, but its really not as bad a report result as being discussed – namely because the seasonal adjustments paint a weaker picture than what actually happened, and we expected a decline in activity because the prior several months were artificially pushed higher with so many more buyers rushing to the market to beat rising rates (or the perception of rising rates).
I’ve long been a critic of my own industry. Like any industry there are terrific appraisers, average appraisers and form-fillers. Post-Lehman there are a LOT more of the latter.
The scenario that prompted these articles and others like them occurs when a sale is properly vetted in the market place and an appraiser enters the transaction and subsequently appraises the property below the sales price. It supposedly is happening in greater frequency now, hence the rise in complaints.
My focus of criticism has largely been centered on appraisal management companies (AMC), who have tried to convert our industry to a commodity like a flood certification or title search rather than a professional service. AMCs serve as a middleman between the bank and an appraiser and they have thrived as a result of financial reform. Most only require an appraiser to be licensed, agree to work for 50 cents on the dollar and turn work around in one fifth the time required for reasonable due diligence. Appraisal quality of bank appraisals has plummeted in this credit crunch era and as a result has prompted growing outrage from all parties in a transaction.
Of course, the market value of the property may not be worth it. But the real estate industry doesn’t trust the appraiser anymore so we point them finger at them automatically.
Yes, it’s a hassle. So let’s decide what the problem really is and fix it.
A long time appraisal colleague and friend of mine once told me before the housing bubble burst:
“Jonathan, you as the appraiser are the last one to walk into the sales transaction. Everyone involved in the sale is smarter than you. The selling agent (paid a commission), the buyers agent (paid a commission), the buyer (emotionally bias), the seller (emotionally bias), the selling attorney (paid a transaction fee), the buyer’s attorney (paid a transaction fee) and the loan officer or mortgage broker (paid a transaction fee) all know more than you do.”
The appraiser in this post-financial reform world doesn’t have a vested interest in the transaction like they did during the housing boom – some could argue they are too detached. The vested interest I speak of occurred during the bubble when mortgage brokers and most banks generally used appraisers who always “made the number.” Incidentally, many of those types of appraisal firms are out of business now.
Let’s clear something up. The interaction an appraiser has with a lender when appraising below the purchase price now is not that much different than during the boom. When an appraiser kills a sale, the appraiser is generally hit with a laundry list of data to review and comments to respond to questions from the AMC, bank or mortgage broker who use the “guilty until proven innocent” approach even though the bank likely won’t rescind the appraisal. The additional time spent by the appraiser is a significant motivator to push the value higher to avoid the hassle if the appraiser happens to be “morally flexible.”
And by the way, sales price does not equal market value.
The sources for most of these low appraisal stories I began this post with come from biased parties so it makes it clear that low appraisals are the problem. In reality, the low appraisal issue is merely the symptom of a broken mortgage lending process. The problem is real and becomes more apparent when a market changes rapidly as it is now. Decimate the quality of valuation experts and you generate results that are less consistent with actual market conditions and therefore more sales are killed than usual. Amazingly the US mortgage lending infrastructure today does not emphasize “local market knowledge” in the appraisers they hire no matter what corporate line you are being fed. This is even more amazing when you consider that most national lenders have only a handful of appraisal staff and tens of thousands of appraisals ordered ever month.
The cynical side of me thinks that rise in low value complaints reflects an over-heated housing market – that the parties are getting swept up in the froth and the neutral appraiser is the voice of reason. The experienced me realizes that financial reform has brought new appraisers into the profession that have no business being here (and pushed many of the good ones out) and that the rise in the frequency of low appraisals has only seen the light of day because housing markets are currently changing rapidly.
Here’s my problem with the mortgage lending industry today as it relates to appraisers:
• Most of the people running bank mortgage functions are the same as during the bubble, only see appraisal as a cost, not as eyes and ears.
• Banks love the current state of appraisals because the values are biased low (banks are risk averse) and they fully control the appraiser.
• Appraisal Management Companies themselves have no real oversight (some are very good, most are terrible).
• Banks no longer emphasize local market knowledge in their appraisers or they pay lip service to it.
• Short term cost savings trumps emphasis on quality and reliability.
Every now and then (like now) everyone seems surprised and feels hassled when appraisal values don’t match market conditions. However the bank appraisal process has largely morphed into an army of robots on an assembly line – either because we are unaware of the problem until it affects us directly or we just want it that way.
Let’s focus on fixing the mortgage lending process or stop complaining about your appraisal.
I wrote a brief article for Country Life Magazine – a weekly glossy magazine based in the UK but distributed globally. Country Life is a beautiful publication chock full of luxury housing imagery. This edition (9/4/2013) had a US property focus to which I gave an brief overview of the US housing market over the past decade.
Note: I agreed to allow the editors “Briticise” my writing to match their audience but I had final approval of the content. So if you notice anything, ie Mortgage criteria” v. “Mortgage underwriting guidelines”, that’s why. 😉
Once upon a time in the American market:
Jonathan Miller retraces the history of the American property crash and examines what is driving fresh price rises [Read the article]
This morning I noticed a quote I had made in an earlier piece this week was one of two quotes selected for “The Chatter” on page 2 of the NYT SundayBusiness section.
“No supply means frenzy, and it means prices rise.”
Forgive this exercise in narcissism but I learned a few things from the process.
Today’s quote mention gave me pause and since I’m midway through our quarterly market report gauntlet I thought I’d take a quick moment to comment on the thrill I experienced this past Tuesday contributing to Liz Harris’ cover story on housing market inventory (lack thereof). It was titled Words to Start a Stampede: New York Apartment for Sale. Liz writes an excellent weekly column with clearly the best title in all of journalism: The Appraisal.
On Tuesday (7/2) I was initially contacted for the piece, beginning a weeklong period of handwringing. At that time I was told it would run on Saturday’s cover (7/6) which seemed like a long time away. However the topic is evergreen (not time sensitive to the day) so it was likely “on the bubble” (pun sort of intended) if any last minute breaking news appeared.
On Friday afternoon (7/5) I learned that Saturday was pushed to Sunday to make room for the crisis in Egypt.
Late Saturday (7/6) evening I learned that Sunday was pushed to Monday to make room for the plane crash at SFO airport.
Late Sunday (7/7) evening I was told that Monday was pulled because former NY governor Eliot Spitzer announced his candidacy for NYC Comptroller and no word on whether it would appear in Tuesday’s edition.
On Monday (7/8) I was clearly hoping for a slow news day so the piece wouldn’t get bumped a fourth time so every news alert required my attention. By the time Monday afternoon rolled around, the article suddenly appeared online so I became confident it would never make the cover – but no page number was assigned to a print page.
The online article appeared on the NYT “Most Popular” page, reaching 13th place quickly soon after it was posted and rapidly ascended to number 4, finally surpassing the very popular article about stool.
I assume this was a way for the NYT to test via crowd sourcing how relevant this story was to deserve a spot on page one. The online article jumped to 2nd place, then 1st on the most emailed list so I began to feel confident that this was the feedback the editors needed. …and we were still ahead of the stool article.
Late on Monday evening the online article was appended by the following notation at the bottom of the page:
“A version of this article appeared in print on July 9, 2013, on page A1 of the New York edition with the headline: Words to Start a Stampede: New York Apartment for Sale.”
On Tuesday morning (7/9) my parents texted me at 6:08am to say they saw the printed version in their town drug store. The article actually made both the NY Metro edition and the US edition so I could share the fun with my relatives outside the NYC area, where social norms are a lot less obsessive about real estate.
Ok, back to work.