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From The Garden State: The Otteau Report: May 2006

July 5, 2006 | 12:01 am |

[This monthly market report is provided by Jeffrey Otteau of the Otteau Appraisal Group who also authors a series of widely followed quarterly market reports on the New Jersey real estate market. This information is collected from various sources including Boards of Realtors and Multiple Listing Systems in New Jersey.]

I have known Jeff for many years and consider him one of the leaders in the real estate appraisal profession. He has taught me a lot about quantitative real estate market analysis. -Jonathan Miller


Following a disappointing April, residential contract-sales activity in New Jersey trended higher in May providing some balance to the housing market. However, while buying activity in May increased 7% from April, it still ran 18% below May 2005 providing further evidence of a structural market change. Some encouragement can be taken in the slowing rise of unsold-inventory which held steady in May at a 7-month-supply of available homes. When segregated by home price, the market is now holding a 6 month supply below $600,000, 10-months between $600,000-$1 million, and 13-months above $1 million.

While there are very real reasons for the current deceleration in the residential market, the extent of that change goes beyond what can be explained by underlying fundamentals alone. Certainly the record high home prices achieved in 2005 when coupled with lagging salary increases, rising interest rates and slower population growth are solid reasons for a market slowdown. More positive indicators are also in play however such as a state economy at virtual full-employment, new home building activity at constrained levels, and mortgage rates which remain low by historical standards. Clearly, the sweeping change that has enveloped the residential market over the past 10 months extends beyond market metrics and is at least partly attributable to fears of a housing price collapse. Apparently the chorus of voices predicting this collapse and the attention they received from the media, have played a role in bringing the market to it’s current state……as always perception becomes reality!

As we look forward to what’s ahead, expect the current situation of fewer sales and higher inventory to continue for the next several years. As a result, some of the increases in home prices which occurred over the past several years will likely be reversed as motivated Sellers trade-off lower prices for quicker sales. Ironically, this is not necessarily good news for home buyers as rising mortgage rates will likely offset any savings derived from lower home prices. In fact, some home buyers will actually lose purchasing power despite a downward drift in home prices. Thus, buyers should consider whether the current combination of affordable mortgage rates, higher inventory levels and negotiable-sellers are reason to buy now rather than wait.

Here are 2005 annual stats.

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PMI Risk Index: San Diego and Long Island, NY Top The Riskiest List

June 28, 2006 | 6:32 am |

The PMI Group released their U.S. Market Risk Index and it showed that the risk of falling real estate markets was offset by the strength of the economy. They use the OFHEO Home Price Index to measure appreciation patterns and track affordability.

To view these charts in full and download the report [pdf]

Here are the salient points:

  • Appreciation remains positive in the nation’s 50 largest markets.
  • 34 markets experienced reduced appreciation rates.
  • Affordability decreased in more than half of the 50 markets.
  • All but 4 markets showed employment growth. (Detroit and Warren, MI; Milwaukee, WI; Cleveland, OH did not).
  • The coasts are most risky – California and Northeast have 13 highest risk markets.
  • West coast has highest appreciation.
  • Affordability improved in 5 markets in Texas and 6 in Midwest.

To listen to the PMI podcast

There’s also a great table in the report that provides the best and worst senarios for mortgage payments.


New Home Sales: To Good To Be True, Literally

June 27, 2006 | 7:18 am |

The New Home Sale stats were released yesterday and provided a “pick and choose” resource for how the housing market actually performed. Every month, the report provides a plethora of reasons why you shouldn’t rely on data that is adjusted, re-adjusted and shows a wide range of results.

Here’s what I mean, as shown in this text taken from the very top of the released New Residential Sales report [pdf]

Sales of new one-family houses in May 2006 were at a seasonally adjusted annual rate of 1,234,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 4.6 percent (±13.1%)* above the revised April rate of 1,180,000, but is 5.9 percent (±10.8%)* below the May 2005 estimate of 1,311,000.

In other words, the question is whether May 2006 New Home Sales were:

A. up 4.6% from April 2006, but down 5.9% from May 2005
B. up 17.7% from April 2006, but down 16.7% from May 2005
C. down 8.5% from April 2006, but up 4.9% from May 2005
D. down 8.5% from April 2006, but down 16.7% from May 2005
E. up 17.7% from April 2006, but up 4.9% from May 2005
F. somewhere in between
G. All of the above

The consensus of news coverage opted to use the nominal figures provided suggesting new home sale gains.

UPDATE: As a reader just pointed out, the confidence level for the monthly change in the Northeast of -7.9% had a confidence interval of 30.9%. The West was nearly as bad.

Thats crazy inaccurate. In other words, don’t use their month over month housing stats. Imagine doing month over month real estate stats in a local market with a much smaller data set?

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With A Landing So Soft, Why So Worried?

June 14, 2006 | 12:05 am |

Besides my previous post about the Global Insights/National City report, there have been a several more in recent days.

Here goes:

Hmmm. Freddie Mac sees a slowdown in housing, the White House economists see a soft landing and Harvard sees a soft landing. Sounds consistent to me. Freddie Mac and White House reports have limited credibility because of their functions. Harvard’s studies are a favorite of mine but I am still not sure of the message. Afforability is weakening, the economy is not doing much and housing continues to appreciate most in the more active markets and volume is dropping off. Soft landing?

There is so much soft landing talk that I am getting a little concerned. Since when have you known so many people make the right call about a complex economy?

I yearn for the old days when the NAR told us what we wanted to hear which they did until a few months ago and we were in a state of peaceful bliss. Now we know more stuff but its comprised mainly of PR housing surveys and reports.

In Seth Joyner’s “I Want My Bubble Back!” post on Motley Fool he addresses the state of housing spin. NAR’s about-face on the housing bubble can be summed up in this quote by David Lereah, the Chief Economist:

Experiencing a slowing from a hot market is a good thing because we need a solid housing sector to provide an underlying base to the economy, and slower appreciation will help to preserve long-term affordability.


But this is a time for the Fed to pause on rate hikes because we have some interest-sensitive housing markets that have become vulnerable.

Seth blames the uncritical press for letting the housing spin go on so long. Given the new public awareness of the proliferation of spin exposed in the blogosphere, I can only imagine how much longer the NAR denial would have continued without such scrutiny. However, I think the press is an easy fall guy on this matter and has been the key target of the real estate industry’s scorn. Its ironic that Joyner makes this the basis of his argument but at the other end of the spectrum.

Herein lies the conundrum.


Overpriced Housing Markets Get (You Guessed It) More Overpriced

June 14, 2006 | 12:01 am |

Yet another 1Q 2006 national housing market report. This time the report is from National City care of Global Insights. Unlike a lot of the PR corporate housing report vehicle studies that are out there, this one is pretty good. Global Insights has taken great care to explain their methodology [pdf] and the data that was used.

They take 2000 census data and grow the stats using the OFHEO study factoring out the refi data that pollutes it. Its a bit of a reach but overall it seems to be a reasonable methodology.

However, its still only a 1st quarter housing report but since it addresses affordability, its got a little more shelf life than some of the other housing studies that have been done.

Here is the summary (download the report as a pdf):

* Overvaluation became more pervasive during the first quarter of 2006.
* Seventy-one metro areas, accounting for 39 percent of all single family housing value, were deemed to be extremely over-valued at that time. That represents an increase from 64 markets, and 36 percent of all single family market value, during the fourth quarter.
* As recently as the first quarter of 2004, overvaluation was insignificant. At that time only 3 metro areas, accounting for just 1 percent of all single family house value, were deemed to be extremely overvalued.
* The coastal states of California and Florida continue to show the highest concentration of overvalued markets, accounting for 17 of the top 20.
* Quarter-to-Quarter price appreciation is slowing in most metro areas, and is nearly flat in San Diego and Boston.
* Property price appreciation remains strongest among the most over-valued metro areas, and visa-versa. Between the fourth quarter of 2005 and the first quarter of 2006, the correlation between valuation and appreciation was +0.36, suggesting that house prices are diverging, not converging, with respect to normal valuations.

The report covers 84% of all 1-family US houses and is pretty gloom and doom because 39% of the markets are overvalued. The economic impact, if these tea leaves are accurate, could be significant.

Here’s some of the coverage.

Housing bubble correction could be severe [USNWR]
‘Overpriced’ housing gets more overpriced [CNN/Money]
Study: More US housing markets are overvalued [BG]
More housing markets overvalued, study shows [MH]

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Harvard: The State of the Nation’s Housing 2006

June 7, 2006 | 11:04 pm |

Every year I look forward to the release of the The State of the Nation’s Housing study by the Joint Center for Housing Studies at Harvard. Its a comprehensive macro look at our nation’s housing that is insightful and easy to read.

Download the report [pdf]

The report suggests that the current housing slowdown will be moderate but affordability problems over the next decade will continue to deteriorate.

Nevertheless, the housing sector continues to benefit from solid job and household growth, recovering rental markets, and strong home price appreciation. As long as these positive forces remain in place, the current slowdown should be moderate.

Over the longer term, household growth is expected to accelerate from about 12.6 million over the past ten years to 14.6 million over the next ten. When combined with projected income gains and a rising tide of wealth, strengthening demand should lift housing production and investment to new highs. But with the economy generating so many low-wage jobs and land use restrictions driving up housing costs, today’s widespread affordability problems will also intensify.

Here’s a sample of some of the wide variety of charts from the study:

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Surveying Surveys: Corporate PR Housing Surveys Are Abundant

June 7, 2006 | 12:01 am |

And the survey says!

There are a lot of surveys available to the consumer these days. For the record, how come it is so difficult for the average consumer to find the actual survey? Usually these surveys are only available as a press release and are reported by a news outlet.

Why is that?

Honestly, I have yet to find or see these surveys in the full original format. If anyone knows how to find them, please share.

The results are usually interesting. Its just that I like to look at the surveys with summary data more closely to be assured that they have reasonable methodologies and nothing stands out as misleading.

Here’s a recap of the most recent surveys of the past week – (reader beware – its mainly happy news):

  • ING Direct Annual Homeowner’s Survey – Synovate, a global research firm, completed the survey for them. The highlight was that 74% of Americans are not concerned about a possible housing downturn next year. This comment on the blog Lanser on Real Estate: If you polled American newlyweds about whether or not they would get a divorce sometime in the future…the numbers would be quite low. Yet about 50% of all marriages end in divorce…go figure.

  • Runzheimer International’s Priciest US Cities Survey considers what a typical family of four earning $60,000 annually spends and compared the costs of maintaining that lifestyle in more than 300 U.S. locations of comparable quality. In Manhattan, that family would need to spend $146,060, 137.9 percent more than in the average American town. This slice of the Big Apple topped runner-up San Francisco by more than $24,000 to earn the dubious distinction of being the nation’s priciest place.

  • 2006 U.S. Trust Survey of Affluent Americans Faith in the real estate market, however, was weak: Only 48 percent said they expect real estate’s value to increase in the next year, down from 72 percent who thought it would in last year’s survey. Thirty-three percent of respondents expect real estate values to decline over the next year. That number is up from 14 percent who thought that last year.

From The Garden State: The April 2006 Otteau Report

June 5, 2006 | 12:02 am |

[This monthly market report is provided by Jeffrey Otteau of the Otteau Appraisal Group who also authors a series of widely followed market reports on the New Jersey real estate market. This information is collected from various sources including Boards of Realtors and Multiple Listing Systems in New Jersey.] I have known Jeff for many years and consider him one of the leaders in the real estate appraisal profession. He has taught me a lot about quantitative real estate market analysis over the years. -Jonathan Miller


The New Jersey housing market took a sharp turn for the worse in April as contract-sales activity declined 11% from the prior month and ran 20% below the April 2005 level. At the same time, the inventory of unsold homes on the market increased by nearly 6,000 homes in April and now stands 71% higher than a year ago. That this deterioration comes in the midst of the prime spring selling season when home sales would normally be accelerating provides solid confirmation that the transition to a buyer-controlled market is now complete.

Different from one year ago when buyers were competing with each other by increasing their offering prices, it is now the sellers who find themselves in a scramble to gain the interest of buyers. In most cases, that will require a reduction in asking price to recapture the lost sense-of-urgency which dissipated once inventory increased and home prices ceased their upward spiral.

In examining the market from the perspective of price levels, there are significant disparities. The unsold inventory of homes on the market presently accounts for a 7-month supply (up from 3-months one year ago). This supply is however less for lower priced homes as demonstrated in the table at right (6-months below $600k, 10-months between $600k-$1-million, and 14-months above $1-million). The weakness in the market in excess of $1-million is likely to worsen in coming years due to a combination of economic and demographic trends which will further disadvantage the luxury home market in New Jersey.

Here are the 2005 annual stats as well.

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Please Show Us Which End Is Up

June 1, 2006 | 7:37 am | | Columns |

In Carol Lloyd’s Surreal Estate column last week Bubble Trouble? What to make of all the real estate trend news [SFGate] she explores the vast outpouring of real estate information and its interpretation available to consumers.

Some economists — typically, those who have staked their professional reputations on being dark-horse skeptics — are predicting nothing short of a global economic apocalypse. Others — often those on the take from the real estate industry — scoff at such dire visions. Don’t listen to the doomsayers, they say, “we’re in for a soft landing.”

But what does all this news mean to the average home buyer and seller? Not much other than to signify that things have changed since last year, at least up to this point.

Across the country, it is generally been reported that, prices are flat or up, yet volume is down.

Yet we eagerly await more data. The Walk-through announced two days ago that OFHEO is releasing their quarterly stats which is used by many government agencies and the numbers may be negative for the first time since its history, as speculated by the well-reguarded blog Calculated Risk (who subsequently put strike-throughs in all references to depreciation).

Economists and market commentators eagerly await new material to discuss (self-included), but the usefulness of the OFHEO report is questionable in a changing market.

Today’s OFHEO report release at 10am contains:

  • the first quarter 2006 (its now June)

  • only closed sales (a 30-60 day lag so it includes November-December contracts)

  • a significant amount of non-sale data (ie appraised value of refinances)

  • only data from conventional mortgages (UPDATE: less than or equal to $417,000), which therefore omits a large swath of data from the east and west coasts.

  • data provided by the agency that is directly responsible for oversight of the GSEs (Fannie and Freddie) of which Fannie has serious issues with accounting violations.

  • UPDATE – only includes 1-family houses

Not a lot of reliability here to feel comfortable about.

Carol correctly summizes about whether to buy or not:

I think the best answer is it that it all depends on what you’re buying or selling and how it’s priced.

Thats sounds like a completely caveated answer but its the only one that can be made and still have integrity. In other words, whats happening in San Diego, CA or Fargo, ND doesn’t necessarily (or likely) correlate with national housing statistics.

Are national statistics helpful? I think they are but only when used for general discussion. For me, its fun to see what goes into the process of collecting the information and the national ramifications. On a local level, the commentators need to connect the relevance, if any, to local conditions.

The analogy I can draw from are the local reports I prepare in New York. My reports can’t be taken down to the baseline level for pricing a specific property. Thats what an appraisal is for. In other words, market reports provide the aggregate of all sales. All 2-bedroom condos in Manhattan are not identical, therefore, the 2-bedroom Manhattan condo stats I provided are merely a starting point and a general indicator of trends. Sub-markets of this 2-bedroom category can be broken up into many smaller segments such as building type, location, size, etc.

Yesterday, a few early comments were made to my weekly Three Cents Worth post on the real estate blog Curbed were critical of my stats, saying they tell us nothing, that I can’t look at historical by going back in time, I can’t use a short term window because it doesn’t show a trend. Therefore this leaves me one remaining option, to chart the future. I haven’t figured that out yet.

In the Inman article Why housing forecasts are (almost) worthless [subscr], writer Marcie Gefner draws this conclusion about predicting the future:

Forecasters, prognosticators, pundits, analysts and others of their ilk are able to predict the future — or so they would have real estate professionals and the home-buying and home-selling public believe. It’s bunk, of course.

I agree with her. The simple fact is that there are many people who do not seem to grow tired of the topic, and are looking to absorb as much information as possible, whether reliable or not, until the next hot topic come along.

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[Getting Graphic] Further Evidence That Housing Has Shifted Gears

May 16, 2006 | 12:01 am | |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

Some Markets Start to Cool As Inventory Levels Rise; Low-Cost Cities See Uptick [WSJ]

Home prices were higher in many U.S. markets in the first quarter of 2006, but the pace of growth is cooling.

In its latest report of home prices in 149 metropolitan areas, the National Association of Realtors said the median price of a single-family home in the U.S. was $217,900 in the first quarter, up 10.3% when compared with the same quarter a year ago. That’s a smaller increase than in the fourth quarter, when the median price of a home was up about 13.6% year-over-year.

David Lereah, NAR’s chief economist, said in a statement that home prices are rising less rapidly because the inventory of homes available for sale is rising. “With the supply of homes picking up very nicely in many areas of the country, pressure is coming off of home prices.” Mr. Lereah also indicated that the trend is continuing into the current quarter, and that he expects price-appreciation will be “returning to normal rates of price growth in the single-digit range.”


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Personal Sleuthing For Housing Intangibles

May 15, 2006 | 12:01 am |

A hat tip to Socketsite for this one. June Fletcher’s Navigating the Web to Find Reliable Housing-Market Data [REJ] addresses the frustrations that buyers and sellers often feel when beginning the purchase/sale process.

_A question is posed to her:_

Why is it so hard to get good data on housing-market prices, especially in major metro areas like Washington, D.C.?

This is always the burning question. Realtors work with the data every day and more often than not, know the market better than you would after basic online research. Thats because brokers are on the front line, viewing properties for a living. However, they are in the business to sell and some are better at selling than research.

But things have changed over the past decade. Overwhelmingly, buyers and sellers do online research first and then contact a broker for the final process of narrowing down their research to make a decision. There are many intangibles that comprise the value of any given property.

The broker brings a certain tactile element to property research (granted, this assumes the broker is an expert).

Her column is very candid about the slant of information provided by various sources. that results in being very basic and sound advice to the reader.

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Generation Y Finding That Awesome House Takes Longer, Stays Shorter

May 12, 2006 | 12:01 am |

Century 21 released a report a few weeks ago that I missed but still think its timely. The CENTURY 21® Homebuyer Survey [Cendant]:

…reveals that baby boomers were driven to purchase their first home based on family reasons while Generation X and Y buyers are more likely to buy or have bought a home as a “safe investment.” In addition, Generation X and Y buyers tend to take longer to buy their first home as compared to baby boomers. Today’s Generation Y buyers are also purchasing first homes at a younger age than their Generation X and baby boomer counterparts.

Length of Time to Purchase Home
Baby boomers were the quickest first time home shoppers polled, averaging 4.3 months to buy their first home, followed by Generation X at 4.6 months and Generation Y at 5.4 months.

Length of Stay
Baby boomers (26 percent) are more likely to stay in their first home for more than 10 years as compared to Generation X (13 percent) and Generation Y (9 percent).

Quite often these corporate surveys can end of being self serving and misleading, but this one doesn’t feel like it to me. It was a national study of U.S. first-time homebuyers, including first-time buyers in their first year of homeownership along with active first-time home shoppers, between March 17 and March 31, 2006. A total of 1,514 respondents completed an online survey.

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