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Economically Speaking, Its Beige

August 9, 2005 | 1:01 pm | |

What is the Beige Book and why is it Beige? Prior to 1970 it was red and not intended for public reporting. Perhaps the color was not considered neutral enough for economic reporting – beige seems to be about as neutral as you can get. In 1983, the Beige Book became a public report.

More digging to do on the latter, but here’s the latest…well, not exactly hot off the presses¦Federal Reserve: Beige Book–New York–July 27, 2005

Basically, economic expansion is now more moderate than earlier this year, including retail sales and labor costs and productivity. It is interesting that one of the items that has kept mortgage rates (long term rates) in check for so long has been the fact that productivity has outpaced economic growth. As a result, large corporations have been more likely to refrain from hiring new employees. The limited growth in employment has kept long term rates in check as investors are less concerned about the threat of inflation.

Construction and real estate were robust across the region, but the rate of price increases has slowed. This doesn’t mean prices are falling, it means that the rate of appreciation is slowing.


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Lending standards continue to slide

August 2, 2005 | 6:11 pm | |

Mortgage financing standards continue to ease in order for lenders to stay competitive. According to an article in the Wall Street Journal the lending risk has been rising along with the rapid escalation in prices.

What is interesting to note, is that standards are easing for investors as well. The NAR reported 23% of all home sales were by investors in March 2005 while First American tracked 9.86% for the first 4 months of 2005. The First American figures are likely to be low because they don’t include second homes. The spread between these two figures suggests that the secondary home market is significant.

Easier access to financing, keeps the churn going. However, the danger is that the combination of leverage and easy access to funds, combined with rapid price escalation, adds potential volatility to the market.

Live by the sword [financing],
Die by the sword [financing].



Can It Be A Bubble If Many Recognize It As Such?

August 2, 2005 | 9:16 am |

An article by By Mark Hulbert of MarketWatch titled Can it be a bubble if many recognize it as such? wrote a great article titled “Are bubbles only seen in retrospect?” based on research by

Professor Robert Schiller, the author of Irrational Exuberance which predicted the NASDAQ market correction and his recent book Irrational Exuberance: Second Edition which discusses the housing boom.

Professor Robert Schiller, who I admire greatly for his insight on the housing market and for whom I got to meet in the green room at the taping of CNBC Town Hall: The Real Estate Boom [Note: WM Clip] basically says that we are not protected from a housing bubble simply because people are worried we are in one.

He defines a bubble as “a market situation in which news of price increases spurs investor enthusiasm which spreads by psychological contagion from person to person, bringing in a larger and larger class of investors, who, despite doubts about fundamental value, are drawn to the investment partly through envy of others’ successes and partly through a gambler’s excitement.”


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The Real Deal – The Real Deal Weekly Interview

August 1, 2005 | 10:09 pm | | Podcasts |

The Real Deal – The Real Deal Weekly Interview

I suggested to Amir Korangy of the Real Deal that he begin Podcasting since his publication would be a perfect candidate for it. The Real Deal has access to many interesting people and their content is always changing.

Not only did he look into this technology right away, but he asked me to be the guninea pig…errr…the first interviewee. 😉

From The Real Deal’s Web Site…

Jonathan Miller at The Real Deal Magazine’s first Podcast on July 15, 2005

In The Real Deal’s inaugural interview in its new weekly audiocast series, we sat down with appraiser Jonathan Miller, president of Miller Samuel Real Estate Appraisers and Consultants. Miller’s reports on the Manhattan apartment market are the most widely cited in the industry, and he has been featured in The New York Times, the New York Post and countless other publications including The Real Deal.

With reports showing apartment prices hitting new peaks each quarter but often differing significantly in their findings we asked Miller how he collects his data, and his thoughts on the existence of a real estate bubble. To listen to the entire interview, click one of the links below.

MP3 Version

Podcast (RSS) Version

excerpt…

THE REAL DEAL: Is there a housing bubble in New York?

MILLER: It’s interesting about the whole bubble psychology the boom and bust orientation in the real estate discussions that have been going on for the last three or four months. Especially because Manhattan is closely tied with the financial markets.

A lot of us remember what happened in ’87 with the stock market crash and subsequent real estate correction that we saw from about the end of ’89 to early ’95. So it is something that is fresh in everybody’s minds, and everybody is trying to relate that to the current experience that we are having now.

When I look at what happened then versus now, it’s apples and oranges, a very different experience. Back then we had a tax incentive-based supply-creation syndrome I made that up, but the idea is that housing came on in large quantities in the mid ’80s because of tax incentives. The 421a abatements gave the incentives to developers to throw foundations in the ground without even plans for what they were going to build just to get the tax credits.

Then all of a sudden in ’86 we had the change in the federal tax laws that eliminated the whole incentive for investors to buy individual units that created a lot of supply. And then we had the co-op conversion frenzy, in which seemingly every rental building that could have been converted was converted. I think the conversion pace today not including 2005, but up through the end of 2004 is something like 10 percent of what it was back then, but that’s largely inclusive of, say, lofts being gut renovated to condo as opposed to existing rental buildings.

As far as today, the situation is we have record low mortgage rates, which are really fueling a lot of the demand and we have an improving but very tepid economy. And we now have supply that is gaining momentum. Your magazine did a great study on the condo inventory that is coming online [in July 2005 issue].

TRD: Thank you.

MILLER: And it’s gaining speed. But it’s still about 3,000 units, give or take, and we have a condo universe of somewhere in the neighborhood of 65,000 to 85,000, depending on who you talk to. So it’s still relatively small. In prior years we were talking about 1,500 units coming online. So the pace is increasing but it’s another 1,500 units a year.

I think the two variables on whether we are going to go into a bubble real estate environment is going to be supply or mortgage rates. There are a lot of other things to look at, but those are two main things. Mortgage rates have been forecasted to increase since the end of 2003, and, generally speaking, they’ve been falling. So, in the equation of supply and demand, it has become a constant.

TRD: Brooklyn has become such a great place for developers to go to because there are so many available lots.

MILLER: For those new developments to come in and be viable they are getting $700 a foot. In Manhattan now, the threshold seems to be you have to be at least at 1,000, and more likely on the new developments you’re talking $1,500.

TRD: If you saw a new development at $1,000 per square foot, would you jump on that and say, “Hey, that’s a bargain?”

MILLER: I guess it’s personal preference. You have to decide whether you like the neighborhood. I’ve always felt the reason why [a neighborhood is] cheaper than a Soho and Tribeca is because it’s not proven as yet for that price structure. So you are going to see more price volatility if you have some sort of market downturn meaning that there is a lot of upside and there’s potential downside.

However, the thing about housing which is very different than stocks, is that, for example, the FDIC defines a housing boom as three years and 30 percent appreciation, and a bust is five years and 15 percent depreciation.

TRD: And how does that compare to our market now?

MILLER: On the upside, we’re about double what their boom figure is. But it’s sort of that idea that on a down cycle, prices tend to be sticky on the downside, that it’s still an asset that’s useable. Real estate is a cyclical thing.

We’ve just seen a lot of the upside over the last five to seven years.

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