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Rentals, Investing

Massey Knakal New York City Income Property Market Report is released

November 6, 2006 | 12:01 am |

My commercial appraisal partner John Cicero of Miller Cicero has been busy lately. He just completed a new market report on New York City income properties. We are really excited about the results. Here’s what he has to say about it:

This week the first Massey Knakal New York City Income Property Market Report [pdf] was released. This is a first of its kind study that I researched and authored on behalf of Massey Knakal, one of the most active investment sales brokerage firms in New York.

Massey Knakal is excited about it too. They are distributing about 300,000 copies of it over the next several months.

Massey Knakal New York City Income Property Market Report [pdf]

Report Methodology [Miller Cicero]


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Top 10 Clipboard: Cities To Love, Hate, Invest, Avoid

October 27, 2006 | 12:01 am | |

CNN/Money’s Business 2.0 has several top 10 city ranking features that are kind of fun to read about. I can’t figure out why we would be curious about a top ten list. After reading a feature like the top ten places to live, do we pack up and move there? Do we call our parents and thank them or give them a hard time for making it our home? Or is it more reassurance that we are living in the right place or simply affirmation that we made a terrible error?

Top 10 cities: Where to buy now
The real estate slump could get worse before it gets better. But these 10 markets offer great opportunities for those who have the patience to buy and hold.

  1. Panama City, FL
  2. Vero Beach, FL
  3. Bridgeport, CT
  4. Lakeland, FL
  5. McAllen, TX
  6. San Luis Obispo, CA
  7. Wilmington, NC
  8. Manchester, NH
  9. Fort Collins, CO
  10. Atlanta, GA

Comment: I don’t see how Florida would have 3 of the top 4 cities to invest in with all the indicators of overheating.

Where not to buy
_These 10 overvalued cities have run their course, and home prices are expected to drop over the next year._

  1. Stockton, CA
  2. Merced, CA
  3. Reno/Sparks, NV
  4. Fresno, CA
  5. Vallejo/Fairfield, CA
  6. Las Vegas, NV
  7. Bakersfield, CA
  8. Sacramento, CA
  9. Washington, DC
  10. Tucson, AZ

Comment: Six locations in California made the grade and the rest have reputations for high investor concentrations.

Bubble-proof markets
_Short-term price drops are possible. But healthy economies and rising incomes will support these “superstar cities” over the long run._

  1. Boston
  2. San Francisco
  3. New York
  4. Los Angeles
  5. Seattle

Comment: With the inventory overhang in Boston and LA, I am not sure why they make the grade. The rest seem reasonable choices relative to the remainder of the country. San Fran, New York and Seattle are characterized by low speculation and solid economies. Missing 6-10.

Top 10 foreclosure markets
_Where the action is – highest portion of households in foreclosure, from RealtyTrac._

  1. Greeley, CO
  2. Detroit, MI
  3. Miami, FL
  4. Indianapolis, IN
  5. Ft Lauderdale, FL
  6. Denver, CO
  7. Dayton, OH
  8. Dallas, TX
  9. Fort Worth, TX
  10. Atlanta, GA

Comment: With the exception of Florida and Georgia, all locations are not located near the coasts. The Midwest is seeing the auto industry struggle which is affecting employment. These Florida markets have heavy investor concentrations.


Mindset Change: Flipping Out, Flopping Around

October 24, 2006 | 7:53 am |

The idea of flipping your property for a quick profit was an exciting and lucrative-sounding idea to many during the real estate boom. In fact it was one of the driving forces of the real estate economy for the past 5 years, until recently. Services like CondoFlip reflected opportunity in the inefficiency of a fast moving real estate market and the urgency for many to get in to it to get rich quick. However, it seems to me that whenever some investment gimmick is mainstreamed, many get hurt. But hey, all those book writers and seminar givers made a bundle.

Now the term “flip” is more like the day-old pizza you left out all night after watching a World Series games with friends the night before, rather than the warm sizzling version that was delivered.

Here’s a story about a 24-year old real estate investor that was covered by USAToday and the San Francisco Chronicle. He is described as the poster child for all that can go wrong. [Find out who that guy’s public relations rep is, he got some great coverage.]

He now has $140,000 in credit card debt and 5 of his 8 homes in foreclosure. From his candor in the interviews, it also looks like he may have defrauded lenders he dealt with in order to get financing. The thing is, that he like others, saw this a business decision, not unlike the way some lenders pressured appraisers to make the number (sorry, here I go again).

He also runs a blog (with advertising) called IamFacing Foreclosure.com with the subtitle “Learning to Sell my Houses Fast, Avoid Foreclosure, Get Out of Debt, and what NOT to do in Real Estate.” and gets a large amount of commenting, much of it not very sympathetic.

Flipping real estate in many markets took on the characteristics of a ponzi scheme. At some point, there is someone left holding the bag.

The National Association of Realtors says that in 2005, 28% of all properties were purchased by investors and I suspect a large number of those were property flippers. I’ll bet the total number of investor purchasers drops substantially by the end of 2006.

Why do so many investors insist on going too far? Is there something in our culture that wants an easy buck, despite the warning signs? Sure many profited but I’ll bet that many kept going after it was too late. Think of all the listings in local markets known for flipping right now. I’ll bet many of those investors had made a profit on prior deals and went one or two deals too far and now regret it. Easy access to cash through creative financing techniques like liar loans, option-arms and others made the decision for them.

My grandfather went to the race track weekly for years and only allowed himself to bring a twenty dollar bill to bet so he would never get into trouble. Of course, he never made it big. “You gotta think big to make it big.”

Yeah, right.


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Location, Location, Location Becomes Housing, Housing, Housing

September 22, 2006 | 9:43 am |

In Randall W. Forsyth’s column Fed’s Worry? It’s Housing, Stupid [Barrons subsc]:

To be sure, the FOMC made sure to keep up appearances by mentioning its concern about inflation. They’d be drummed out of the central bankers’ club if they didn’t. “Readings on core inflation have been elevated, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures,” which the FOMC cut and pasted from its Aug. 8 directive…

It’s clear why inflation is off the Fed’s worry list. But why does housing top it? It’s not just that the Fed inflated the housing bubble (which it did) to offset the effects of the bursting of the tech bubble (which it also blew up.) It’s that housing busts hit the economy far harder than equity collapses.

This is consistent with international housing busts based on a study by International Monetary Fund in 2003 [pdf], that Mr. Forsyth cites, for the following reasons, housing market corrections:

  • impact consumer spending more than stock market corrections
  • impact the banking system
  • influence other asset classes like equity prices
  • result from credit tightening. Home values decline but mortgages do not decline at the same time.

Because of the last point, making credit easier to get (ie lower mortgage rates) probably won’t solve the current housing problem. Current affordability problems are impacted more by housing prices than by mortgage rates or tight credit. In fact, credit has never been easier to get and mortgage rates are relatively low and seem to be poised to go lower.

The CME Housing Index seems to support the argument that housing prices are going to decline. [CNN] Trading results were consistent to the actual index for August suggesting some predictive abilities of housing prices, even though the trading volume is too thin to be fully reliable.

Robert Shiller, whose company developed the index, suggests that the index would likely exagerate the decline somewhat due to the risk premium considered by the investors, since they are investing for their opwn protection, not for the local housing markets.


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Mortgages: Wondering Where All The Delinquents Are

September 20, 2006 | 6:37 am | |
Source: Wachovia

According to the recent press release by the Mortgage Bankers Association Some Delinquency Measures Tick Upwards in Latest MBA National Delinquency Survey:

2Q 06 delinquency rates fell 2 basis points to 4.39% from 1Q 06 and were up 5 basis points from 2Q 05. The decline from the prior quarter was attributed to the surge in delinquency after Hurricane Katrina.

“In previous quarters we indicated a number of factors including the aging of the loan portfolio, increasing short-term interest rates, and high energy prices have been putting upward pressure on delinquency rates. To this point, generally healthy economic growth and labor markets have kept delinquency rates from rising. However, we are seeing increases in delinquency rates for subprime loans, particularly for subprime ARMs. It is not surprising that subprime borrowers are more susceptible to these changes.”

Foreclosure rates, the next stage of the delinquency process were 0.99% in 2Q 06 up from 0.98% in the prior quarter. The RealtyTrac foreclosure rates that are released each month infer much higher foreclosure levels which I discussed in an earlier post. Overall foreclosure rates are still considered low but a weakening economy is bringing additional concerns.

Source: Wachovia

A Wachovia Corporation Economics Group report [pdf] (via FXstreet) suggests that the delinquencies are concentrated in a few states yet the projected income growth in these states is above the national average. The article suggests that the growth in income will temper some of the problems as mortgage rates reset over the next 12-18 months. Since the delinquencies seem to correlate in markets known for investor and flipping purposes, the numbers don’t show a national problem, yet.

In David Berson’s weekly commentary post, he wonders Mortgage Delinquencies remain low, but will they stay that way? [FNMA]

First of all, the behavior of home prices is an important determinant of serious delinquency rates. If a household has enough equity in a home it could either sell the home or extract some equity, so a delinquency resulting from a negative shock to a household (e.g., job loss, serious illness, etc.) should not lead to a foreclosure. The rapid home price growth seen over the past few years in much of the country should mitigate the risk of foreclosure. However, we expect national home price appreciation to slow this year and next, and some areas of the country could see declines. In those areas, a decline in home prices could leave some households with a mortgage balance significantly in excess of the value of the home. Increases in interest rates that would cause payments on adjustable-rate mortgages (ARMs) to rise sharply relative to incomes could also lead to increases in the serious delinquency rate. While only about 30 percent of prime conventional mortgage originations last year were ARMs, the ARM share was significantly higher in the subprime market. Many of these subprime ARMs have short fixed-rate periods and will be adjusting in the next year, which could lead to rising serious delinquency rates.

Note: Berson’s link lasts one week. After 9/24/06, go here and search for his 9/18/06 post.

I think the overall problems related to the mortgage delinquency rate will be strongly influenced by how quickly mortgage rates move upward. Right now mortgage rates are projected to be stable as the economy continues to weaken and inflation is held in check. However, mortgage rates are already higher than when many adjustable rate mortgages (approximately 30% of the all mortgages) were issued.

Rising personal incomes may serve to contain the problem since the areas with the highest real estate investor concentrations are located in areas with the largest personal income upside. I wonder if good job prospects in these areas helped fuel the speculative characteristics of local markets.

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Outstanding On Our Soapbox This Week: Have I Taken This Diversification Thing Too Far – Or Is It Time To Rebalance Our Portfolios?

August 2, 2006 | 6:37 am |

In this week’s Solid Masonry weekly post on our other blog, Soapbox, Have I Taken This Diversification Thing Too Far – Or Is It Time To Rebalance Our Portfolios?, appraiser John Mason frets over diversification in his portfolio and wonders if he can still walk a tightrope.


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Swimwear on 9: Lord & Taylor Gets New Owner, Flagship To Go Condo?

June 23, 2006 | 12:01 am |

Actually, swimming in Fifth Avenue condo inventory…

In Peter Slatin’s column Lord & Taylor’s New Master [Forbes.com] he announces that new owners have purchased the shopping chain and speculates that they may have seen hidden value in their real estate holdings. The flagship store may be the source of speculation of future condos?

Although condo conversions have been spreading all along Fifth Avenue, from the Plaza Hotel at 59th Street to south of the Empire State Building at 34th Street, all indications point to a slowing market, and it will take the new owners some time to get plans in place to make significant changes in the property–if that’s what they seek to do.

“Our plan is to operate the company, review every store, understand which should be left alone and which should be modified,” said NRDC principal Richard Baker. “The flagship will be analyzed like everything else–does it need to be that large? Maybe it only needs to be half that large.

Hotels have gotten all the press lately about their conversion to condo. Could department stores be the next ones to go? Unlikely and there is no real pattern yet. Admittedly I am stretching here, but what about the former Gimbels on 86th and Lexington (a condo)? The former Alexanders on East 58th and Third Avenue (a condo) and a few others.

My angst about this potential conversion is this: My offices are around the corner…

Where am I going to go for that last minute gift?

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Do I hear $10 Million? Looking For A Shortcut By Way Of Auction

June 19, 2006 | 8:33 am | | Public |

In this Sunday’s cover story in the New York Times real estate section, Teri Rogers addresses the growing auction phenomenon in Taking Another Look at Auctions [NYT]. The intro of the article uses the former chairmman of GE, Jack Welch, who is known for his business savvy. He has taken this route after his house did not sell.

Like Mr. Welch, whose other Connecticut house lingered so long unsold, many sellers who are now dipping their toes into auctions have first thrashed about in the riptide of what is increasingly a buyers’ market. They have suffered the emotional distress of an extended listing, and if they have already bought their next house, they are battered by double mortgages.

To them, an auction’s speed (often 45 to 60 days from first showing to closing) and finality (no further negotiations may occur after the gavel comes down or a sealed bid is accepted) outweigh the negatives: marketing costs ranging from several thousand dollars for a four-bedroom tract house to $100,000 for a Welch-sized estate, usually paid by the seller whether or not the auction succeeds; negotiable commissions as high as 10 percent; and a selling price that typically lags 10 percent below the last listing.

During the last housing downturn, auction sales proliferated as a vehicle to get rid of thousands of unsold listings during the 1990-1991 recession. Today economic conditions are significantly better than the last post-housing boom period so the motivations are different.

Rather than focusing on the mechanics of the transaction which was covered in the NY Times article, I am more interested in its impact on the ultimate price and marrketing time.

Contray to conventional wisdom, auction sales were occuring during the recent housing boom [Sun-Sent.].

As the nation’s housing market continues to soften after a five-year boom, more sellers are eschewing traditional real estate listings for public auctions, which accounted for 6 percent of all U.S. real estate sales in 2004, according to the National Auctioneers Association. That number grew to 19 percent in 2005 and is expected to balloon to 30 percent by 2010.

I would submit that those figures (1 in 5 sales) appears exagerated, however the trend would be expected to continue during a weakening real estate market.

Its yet another vehicle for marketing hype that may or may not be effective.

auctioneer for Palm Beach Gardens-based Illustrated Properties, added: “Auctions create a buying frenzy. It’s an ego thing. If you’re trying to buy something, you don’t want the guy next to you to have it.”

How does an auction sale fit into the overall scheme of things?

Quite often, properties that go to auction were either overpriced or the seller wants to accelerate the marketing time. Its not a panacea for sellers because at the end of the day, its all about price. As people look to beat the market, they become more open to explore other options for sale.

  • Its all about price – Say that a property that is set to go to auction would normally take 150 – 180 days days to sell in the current market, assuming it is set at the correct price. With more listings, the increased competition brings longer marketing times [LA Times]. The auction process could cut that time down to 45-60 days. That doesn’t come without a cost. In order to reduce the marketing time, the price might be dropped by 10% or more. There’s no such thing as a free lunch. If the property is over priced, then it probably won’t sell unless that price is adjusted.

  • Auctions are the last resort for stubborn sellers – If the property won’t sell because its over priced (market conditions define the property value, not the seller), then sellers are more open to atypical techniques but will end up doing something about the price anyway in order to move the property.

  • In an auction, the property is exposed to a different buyer pool – Buyers of auction property are usually bucking convention and tend to be more savvy than the typical buyer. With that savvy comes great price sensitivity and different motivations. Its that narrow slice of buyers with a different motivation are those whom the seller is counting on.

In the Welch example, the property was not selling and had been on the market for a long time. By definition, the property was likely over priced. There’s no magic to this. If he sells it quickly at a reduced price via auction then perhaps it would be considered a success because it met his time objective and it would be hard to argue with the success of the auction. However, the sale would more likely be attributable to the fact that it was featured on the front page of the New York Times real estate section.



Housing Cycles Everywhere You Look

May 30, 2006 | 12:01 am |

In Kenneth R. Harney’s always insightful column, The Nation’s Housing, he discusses the types of housing markets in Market Action Slips Away From Coasts [WaPo].

First American Real Estate Solutions [note: I have had terrible experiences with their customer service, but their research is pretty good.] has completed an extensive analysis of 100 major metro areas to understand more about housing price cycles. There are 3 major categories:

  • Linear markets where booms and busts almost never occur.[Columbus, Ohio; Indianapolis; Houston; San Antonio; Memphis; Atlanta; Cincinnati; Des Moines; and Louisville.]

  • Cyclic markets are the shooting stars of housing booms. Generally they are along the East and West coasts, where household incomes are higher and land for new construction is in short supply. [California south of the San Francisco Bay, Florida, Washington DC, Baltimore, New York and much of New England.]

  • Hybrid markets have linear, slow-growth characteristics for periods, followed by periods of moderate cyclic-style appreciation. [Chicago, Seattle, Minneapolis-St. Paul, Detroit and Phoenix.]

By understanding the type of housing market a property owner is currently in, they may be able to make better choices when it comes to housing. For market-timer wannabes, it sure seems like you don’t want to be in the midwest because there are no cycles, however, thats where there has been much discussion about the location of the next housing boom as the coasts cool off.

However, housing is a lagging indicator, not a leading indicator, and rising mortgage rates have eliminated much of the flexibility for real estate investment. If the midwest is currently attractive to investors who want to make returns on housing, then lets be clear what type of investors we are speaking about: institutional investors with deep pockets, not individual investors, who days are numbered.



To The The Economist, The Housing Outlook Bears All

May 30, 2006 | 12:01 am |

The Economist magazine has been bearish on housing since at least 2002. The current issue is no exception.

[My apologies in advance to those who do not have a subscription, but its well worth getting one. -ed]

The current cover story features the image a bear: Despite the rattled markets, the world economy is still relatively strong. Just don’t bet your house on it [The Economist].

They seem to be less concerned with the equities markets and more concerned about the housing market in the US and its global implications.

By borrowing against the surging prices of their homes, American consumers have been able to keep on spending. The housing market is already coming off the boil. If prices merely flatten, the economy could slow sharply as consumer spending and construction are squeezed. If house prices fall as a result of higher bond yields, the American economy could even dip into recession. Less spending and more saving is just what America needs to reduce its current-account deficit, but for American households used to years of plenty it will hurt.

My beef with the Economist, is their love affair with the rental market and its relationship to owner occupied housing. The rental equivalent of owner occupancy, because it is less than the cost of housing, portends certain doom from their view point. This has always struck me as overly simplistic. For many reasons, an investment property is rarely of the same quality or caliber as an owner occupied property and reflects different motivations and buyers. This is the same flawed rationale that includes the rental equivalent of housing in our CPI stats rather than using actual sales stats to represent the housing market. Rental markets have not behaved like the owner occupied markets have during this recent housing boom.

I think its more directly related to affordability. Low mortgage rates have been the key driver of this boom and any other factors are minor in comparison.

In fact their focus on this point has gotten to be the source of some rather dark humor in economics circles. However, the tone of this article seems to back-pedal this 5 year argument a bit, providing both a hard and soft landing scenario.

Here’s a sample of articles for each of the past several years that repeatedly show their view point that the American housing market is headed for a hard landing.

The current bear article seems to be calling for the Fed to continue rate increases because for the world, it is best that America slows today. Later, imbalances will loom even larger. The Economist seems to be saying that inaction by the Fed now would raise the odds significantly that we could see a recession in 2007 as a result.

I contend that the slowing housing market has not been fully represented in the current array of economic stats, and when it does, a recession is already possible without anymore increases by the Fed.

Lets hope that Bernanke doesn’t read The Economist.

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The Golden Jackass Hates CPI As It Relates To Housing

May 25, 2006 | 12:01 am |

The Golden Jackass, a market research company, in its column Backfire on Corrupted Price Index [Goldseek] discusses why the (tongue-in-cheek) column calls the Consumer Price Index, the Corrupted Price Index. The way the housing market is handled within the CPI calculation is to blame. We discussed this in a prior post.

Buy the property, bid its price up, while the rental properties go begging with minimal attention. Now rising rents are the new phenomenon, as the housing boom deflates. House properties are fast becoming unaffordable. People flock to rental homes and apartments, thereby pushing up rents requested and paid.

The down side of the corrupted CPI game has begun to show itself in the latest month. Not only have housing prices softened, but the balance of rent versus housing price now damages the CPI as reported. A jump in the rental component was enough to lift the April CPI by 0.6%, translated into 7.2% annualized. The shelter cost accounted for half of the increase in the core CPI increase. The financial markets remain transfixed on the core, in defiance of the harsh reality for the communities and corporations which must eat food and consume energy.

Is current inflation overstated? If housing prices are flat as best case and rents are rising, the current methodology is to use the rental equivalent of sales activity as part of core inflation. Since housing is something like half of the core inflation result, CPI will be overstated. Of course during the housing boom, just the opposite was true. Inflation would have been significantly understated.

It makes you wonder what use CPI has in the real world.



[In The Media] Fox News Clip for 5-19-06

May 19, 2006 | 8:40 pm | Public |

Here is a clip of my live appearance on the Friday afternoon edition of Studio B with Shepard Smith on Fox News. [note: a better edited version will be posted Monday]

I spoke about baby boomers buying vacation homes as retirement vehicles.

Here are some random facts or insights that I collected prior to the show:

  • About 15% of transactions at our firm are second home purchases. In New York City, they are known as pied-a-terres. But they are just as common in Vermont, Florida, North Carolina, Nevada, etc.

  • People tend to spend less on second homes than on their primary residence. The national median price for vacation homes is $204,100, while for all homes the median is about $220,000. That means vacation homes national median price is 7.2% less than the price of all homes.

  • When you take a vacation you don’t need the same amount of space because you’re going to be outside skiing, swimming, or whatever. And the idea is that when you retire you don’t need the same sized house as when you had the kids.

  • In 2005, the NAR reports that 12.2% of home purchases were vacation homes, and 27.7% were investment properties. Some of the investment properties could end up as retirement homes later. 60.1% were primary residences.

  • Nationally, vacation home sales in 2005 increased 17% over the prior year, to a record of 1.02 million vacation homes, according to the NAR. Those numbers are being driven by baby boomers.

  • There are 72 million primary homes in the U.S. and 6.6 million vacation homes.

  • Baby boomers are in their prime earning years. We still have historically low mortgage rates, and it has allowed people to look at a second home.

  • Baby boomers are inadequately prepared for retirement and are looking at their home, second home, or land as an investment that will pay off later and that can enjoy now.

  • Baby boomers have expanded the quality of their own lifestyle with less of an eye towards their retirement. That’s why so many are unprepared for retirement. A second home is both a way to prepare and a way to further improve their lifestyle.

  • The fact that a second home is a tangible asset that they can physically use when they retire or take a vacation has a strong appeal, over investing in stocks for example.

  • The sales volume is expected to be high over the next decade due to Baby Boomer demographic.

  • Most buy second homes within 200 miles of their primary home. Beaches or waterfront areas are most popular, then golf, theme parks and winter recreation.

  • Before 1997, the only way to avoid capital gains in the same of a home was to trade-up. So, people would downsize an existing home and use the proceeds to buy a new primary home and new second home.

  • Average Home Size Is Growing: 1950: 963 1970: 1,500 2005: 2,400

  • Average Lot Size Is Shrinking 1980: 9,000 2005: 8,000 That may also be encouraging people to purchase vacation homes, where they can enjoy the outdoors more.


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