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November 10, 2017

Rental Housing, Concession and Paired Sales Analysis Not Using PowerPoint

If you are a homeowner, what was the first thing you did to make the house yours? I put an old tennis ball on a string in my garage to mark how far I could go. Home Depot has a cooler version [1] that I use in our current house. What did you do?

[2]

One other thing and then I’ll get to the good stuff. It falls under the category of “When you do something, why not give it your best effort?”

This is guy made a video to sell his girlfriend’s 1996 Honda Accord for $499. eBay bids got up to $150,000 until their fraud alerts kicked in. Still, it eventually sold for $5,100 or 10x what it was probably worth. Who says marketing isn’t effective? This comes from someone who is focused on numbers and logic when it comes to pricing real estate, not hopes, dreams, and viral videos. The lesson for me here is that marketing can go viral in real estate, but it’s nearly impossible to count on. I’m still sticking with setting a realistic price…but oh how that car looked good.

but I digress…

The “Elliman Report: Manhattan, Brooklyn & Queens Rentals, October 2017” was released

Our analysis of the October rental market in New York City [3] was published by Douglas Elliman Real Estate [4] this week, part of the expanding series I have been authoring since 1994.

As has become a monthly tradition, it’s always heartwarming to see that Wall Streeters love to read about the rental market, especially with all the multi-family development in the pipeline. This report was in the 5th most read story [5] on the Bloomberg Terminals worldwide (±350K subscribers).

[6]

And a chart!

[7]

There was a lot of well-written coverage of the report results [8]. One of the more challenging concepts was presented in the above chart. Even though the high end seemed to be rising (doorman) after 27 consecutive months with more year over year price growth in non-doorman buildings (the breakout is always roughly 50/50), it really was the result of a shift in the mix towards new development entering the market.

In addition, the market share of concessions broken out by existing and new development is quite interesting. The lower the market share of new development activity, the lower the share of concessions used.

[9]

And here are some of our favorite rental market charts:

[10]

[11]

[12]

[13]

[14]

Homeownership is Rising And It’s Real

Alongside the financial crisis and the subsequent decline in the homeownership rate, there has been the silly proclamation that the U.S. will become a nation of renters. Credit conditions have not normalized as evidenced by the mortgage rate decline of the past decade with the parallel fall in residential mortgage origination. I’ve written about this [15] on Matrix quite a bit.

My friend and prolific columnist/radio host Barry Ritholtz writes a good piece today on Bloomberg View: Millennials Leave the Basement to Buy Homes [16].

Here’s the required chart.

[16]

That Sinking Feeling

As my loyal Housing Notes readers know, I have been obsessed with the tallest building west of the Mississippi that is sinking. A big 60 Minutes story last weekend covered the problems with the Millenium Tower in San Francisco [17]. I’m sure appraisers in San Francisco asked to value units there for litigation say “why me” and have volumes of disclaimers in their reports.

The 60 Minutes story calls it The Leaning Tower of San Francisco with an opening comment from the narrative that says “When the zeal for development overtakes common sense.” Curbed San Francisco [18] has a lot of great links on the topic.

PowerPoint is the enemy

Throughout my career, I’ve avoided using PowerPoint in my real estate presentations. While I often provide information that can be distributed to the audience afterward, I don’t want the audience distracted while I am speaking. It’s my job to enthrall you, not the software program I am using. A powerpoint presentation assumes you think in a linear way. I am anything but linear. I’m not saying it should never be used, but for many, I view it as being used as a crutch. I’ve long been a fan of Edward Tufte for various reasons but his view on PowerPoint is particularly insightful [19].

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Here’s an old New York Times article on the topic: We Have Met the Enemy and He Is PowerPoint [21]

[21]

Giving Post-War Apartments Credit For Affording Us The Manhattan Experience

The epic New York Times Real Estate cover story this weekend: The Plight of the Postwar Apartment [22] was a joint effort based on my research. Unless I missed it, this analysis has not been done before and it shows just how critical the post-war construction stock was in the evolution of Manhattan and has fine-tuned my narrative history of Manhattan housing.

[22]

I’ll be blogging about this next week and will insert in the subsequent Housing Notes. In the meantime, here is a break down of a year’s worth of sales separated by each decade that the year built falls within and broken out by apartment size. Follow the peak of each unit size – notice how it keeps moving to later decades? This is analysis was based on sales that closed from July 1, 2016 through June 30, 2017.

[23]

The Biggest Mystery of Manhattan New Development Market Is Answered With Actual Data

One of the challenges of the new development space and the most asked question is: “How much has the high end of the new development market corrected since the 2014 peak?” As I spoke about in previous Housing Notes, this submarket corrected virtually overnight in 2014 which was measured by the lack of sales. I have endured watching housing pundits pontificate that it may crack soon. It was nearly impossible to confirm because super luxury sales virtually stopped (not the balance of the market). Since 2014 we have seen developers embrace negotiability but some simply can’t.

This week there was a foreclosure sale at the poster-child and most written about new development building known as One57. I thought I would use these sales as an opportunity to measure the shift in the market. There were 5 bidders at the auction and the property sold for $36 million. I presume that these bidders were fully informed so it is not reasonable to frame this sale as below market, especially when there have been others that resold for about the same drop from 2014 ie “Peak New Development” pricing. I whipped up a chart to illustrate all the resales that I could find in the building. There were two sales that flipped higher before the peak and 3 sales that flipped after the peak. The pattern shows you a market-based valuation of the difference in marketing periods. In appraisal vernacular, these are “paired sales” where everything is the same other than one amenity. In this case that amenity was “time.”

[24]

Phrase of the Decade: ‘Retail Apocalypse’

The term ‘Retail Apocalypse [25]‘ is now official as The state of the retail market has lots of ramifications for the housing markets. Employment in particular and even the new urbanism craze where everyone wants to walk to their local stores to buy artisanal sandwiches with goat cheese, cranberries, and walnuts. Landlords are struggling to figure out what is happening [26].

Clearly Amazon and online shopping is a key element in the new math. Whatever is happening, the impact is nationwide and it is startling. Consumer patterns are changing radically that are sucking the blood out of the industry. Bloomberg has an amazing explainer page: America’s ‘Retail Apocalypse’ Is Really Just Beginning [27]

[27]

Douglas Elliman’s Video on My South Florida Analysis

Jay Parker [28], CEO Florida Brokerage lays out a top-level overview of the market reports [29]:

Useless But Somehow Vital Information

When I was in college in the late 1970s, we used punch cards for programming. You’d submit a huge pile of cards (each card was a line of code) to someone who’d drop it in a hopper, then sit in a waiting room and watch your number move through a list until it was complete and you’d be handed a printout of the results. If there was a mistake, you’d replace the bad code with a new punch card and submit the whole stack again. As tech-savvy as I think I am, I never enjoyed that era.

Incidentally, 4.5 megabytes of data in the photo below is about the same size as that 2-minute song on your iPhone right now. That’s some context, baby.

[30]
[Historium]

Appraiserville

Academia Opines on Super Generic Random Number Generators

This week’s focus is on the need for neutral market valuation experts versus automated valuation models. Placing politics aside, I was trying to imagine the special prosecutor in the Manfort valuation dispute [31] or an attorney in a matrimonial matter using an AVM to determine value and place it in public record. What would that say about our justice system by relying on a generic benchmark to search for the truth? What does that say about our banking system with Fannie Mae Appraisal Waivers and normalization of AVMs as some sort of obvious full and complete replacement for human expertise? Imagine what would happen if the federal backstop went away? Look, I’m not saying AVMs don’t have a role in the mortgage business, but I don’t like it when smart people talk so generically about our profession as “experts.” My problem with academics is that they can miss the nuances of real-world situations.

Last August I shared the Wharton white paper: Why Automation Is Killing the Property Appraisal Business [32] that said appraisers were going to be replaced by AVMs. One of the Wharton authors had a discussion about it with Stan Humphries of Zillow who is a nice and very smart guy who helped mainstream automated valuation but has a vested interest in AVMs. Academic rule #1 from Warren Buffet “Never ask a barber if you need a haircut.”

What is missing from their white paper logic, is that data quality dramatically varies by municipality and housing prices are generally rising. Don’t get me wrong, I have guest lectured at Wharton and very much admire their real estate department.

At this moment, the level of value precision required from lenders seems to be low and tolerance high for stand-alone AVM drech. There was an interview with the same author with Valuation Review that dredged up more feelings of disbelief on the disconnect from real-world experience. The Open Door [33] reference was particularly meaningful since I just saw a presentation by Open Door at our RAC conference in Dallas last month – Open Door themselves said their model only works in homogenous housing markets. These are the types of generic oversights made in the academic super generic macro analysis. Everything is in one bucket.

No, it’s not.

A Brilliant Idea

If you need something rock solid in your life (particularly on Friday afternoons) and someone forwarded this to you, or you think you already subscribed, sign up here for these weekly Housing Notes [34]. And be sure to share with a friend or colleague if you enjoy them. They’ll buy a mini-keg of Hidden Valley Ranch Dressing [35], you’ll discover a creative way to paint the town with sex [36] and I’ll feel hungry like the wolf [37].

See you next week.

Jonathan Miller, CRP, CRE
President/CEO
Miller Samuel Inc. [38]
Real Estate Appraisers & Consultants

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