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Posts Tagged ‘Goldman Sachs’

[Video] Talking Housing on Bloomberg TV’s Surveillance 9-24-13

September 24, 2013 | 12:10 pm | | TV, Videos |

Always fun (and refreshing) to talk housing with Tom Keene, Sara Eisen and Scarlet Fu on Bloomberg TV’s Surveillance. I always watch or listen to the show on their apps as part of my morning routine. Got to meet and hear great insights from Jim O’Neill, Bloomberg View columnist and former chairman of Goldman Sachs Asset Management as well.

Did I tell you I am still the mayor of the Bloomberg Cafeteria on Foursquare?

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I’m Sorry But Don’t Blame Me, I’m Neutral

May 4, 2010 | 8:45 am | |


(courtesy: CS Monitor)

Admittedly I am getting annoyed about the lack of closure on this credit crunch thing. Can’t we simply point fingers, have someone apologize but indirectly deny responsibility and then we can then get back to buying stuff and building extensions on our houses?

Make no mistake, the credit crunch is one big mistake. It’s called a systemic breakdown because so many in the economy played a role in our economic demise. Moral hazard, government backstops, bailouts, stimulus, bonuses, trillions, synthetic CDOs have been placed in the forefront of our thinking.

But no clear financial reform path is being taken – in fact it took an investment bank using swear words in an email to get Washington’s attention and break the political maneuvering. Each party is planning to oversteer the solution to their agenda which was part of the problem that lead to this crisis. While we all worry about “free markets” we have forgotten how important it is to create a level playing field. Without rules, free markets degrade to chaos and lack of investor participation. We are seeing this now within the secondary mortgage market, especially jumbos.

We can never remove the human factor from the problem since regulators were clearly asleep at the switch (since Clinton) compensation had perverse incentives favoring short term profits over long term viability, regulators were neutered by the prior administration (think prior SEC under Bush) so its dumb to have some sort of czar. It’s never one factor – it a combination of people, events, institutions and politics that light the fuse.

I am looking forward to some sort of meaningful financial reform. If neutrality isn’t baked into the system, then this is all a big waste of time. Regulators need authority and can not be influenced and investment banks can’t pick the regulator they want. Rating agencies should not be paid directly by the investment banks whose products they rate. Appraisers can not be fearful of their livelihood because they don;t hit the number, etc.

Here’s what it all boils down to now: blame and being sorry.

Blame
Another Jonathon Miller (no relation, but awesome name) and his wife are suing a large builder for not preventing flipping in their housing development which brought in “irreverent transients” who party loudly, park erratically and install unauthorized satellite dishes.

I’m not doubting those conditions exist and it appears to be a creative way to get your money back.

When the housing market collapsed, some contracted buyers abandoned deals. From the outset, the project exhibited “ghost-town-like” qualities, the suit says.

Looking back, the Millers say the developer should have worked harder to prevent so-called flippers from buying units. Buyers were supposed to stick around for at least 18 months.

Saying I’m Sorry
In particularly interesting Reuters Summit Notebook piece, People make mistakes, take Alan Greenspan and Captain of Titanic

Phil Angelides, Financial Crisis Inquiry Commission chairman, says he’d rather see some taking of responsibility than hear another “I’m sorry.”

“Personally I don’t see my role as … to obtain apologies. What I don’t hear is a sense of responsibility and self-assessment about what occurred. There seems to be a disconnect between the practices that people undertook and the financial collapse,” he said at the Reuters Global Financial Regulation Summit.

“I’m struck by the extent to which all fingers point away generally from the person testifying,” Angelides said.

When it gets to this point, its too late. Let’s try to be proactive with some sort of meaningful financial reform. Not more regulation, not fewer protections for neutral parties.

If we can’t do this as a country, well, don’t blame me.

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[Market Report Pulse] Sales Contract Data Can Mean Nothing

January 16, 2009 | 2:44 am | |

One of the most sought after trending tools for housing markets is contract data. Not listing data, not closed data. Contract data.

Compile a lot of data across all regions, property types and price strata and you are golden. You are observing the market as close to the “meeting of the minds” as is humanly possible – you have its proverbial pulse.

I thought to write about the concept of reporting contract data after I got a call from The Real Deal about a new contract-based real estate market report. Their founder is a very creative, very smart and very successful marketer of real estate, first as an agent and then as a marketing expert for new developments. Visually, the report is beautifully done, consistent with the quality of their firm’s marketing materials and online presence. However, they might consider dropping the name of “real-time” from the report. It’s monthly. I understand the intention, but the use of the phrase “real-time” infers a live feed, which this report is not. Isn’t “monthly real-time” an oxymoron?

A quote from The Real Deal article:

It tracks contracts info. To me, that’s what reflects the marketplace and where we are currently, not closed information, which is actually a look back in history.

Another company attempted “real-time” a few years ago by treating real estate listings like the stock market and began publishing a “ticker” type interface. I have to give them credit for the innovation, but it never really got people’s attention.

But I digress

What is contract data exactly?

It’s a property sale with an executed (both parties signed) contract – It is usually 45-60 days ahead of a closing date if new development data is excluded. Actually this 45-60 day time frame is currently expanding as lenders become more difficult to deal with. New development data in the mix could lag the market by 1 to 2 years.

I sort of dealt with contract activity in the most recent market report numbers in my 4Q 2008 Manhattan Market Overview but not in the traditional sense of aggregating contract data and trending it.

Our appraisal firm began to see a pattern in late September 2008 where current contracts of properties we were appraising, were clearly lower than contracts signed in the summer of 2008. The range was roughly 15% to 20%. My 20% number has been widely referenced by the Fed, Goldman Sachs and others, and in fact, page one of AM New York published the number “20%” in red on the entire cover. But our conclusions were based on more of a case by case analysis, similar to a repeat sales analysis.

I don’t currently issue contract reports but I certainly aspire to, but only when I have credible results. Periodically I’ll see one of my appraisal competitors distribute a press release with their own contracts tabulated. I’ll see real estate brokers and marketing agents issue contract reports.

Readers oooh and ahhhh over the relevancy of contracts because the data is perceived to be fresh and current. In principle it is current, but in practice it is much more subject to skew than other data.

I also wonder why methodologies are never fully provided, especially those prepared by marketing groups or departments.

Here are the issues that make much market analysis of contract reports suspect, despite perhaps the best intentions of the authors.

  • Quantity of data — the key issue that makes much analysis unreliable – absent from the public domain.
  • Location of the data — contract data tends to be sourced from a few institutions or entities so its availability and the potential for skew is very serious.
  • Unit mix of the data — This is subject to skew depending on the source of the data – what type of business they have – who their customers are (low end, high end, studios, 3-bedrooms, etc.)
  • Source of the data — The four largest real estate brokerage firms probably account for 80% of all sales in Manhattan. I know each of the senior management teams so I am fairly confident they will not release contract data in bulk to anyone outside their company, especially to a competitor.

I have never met a broker that will share contract data in bulk because it can jeopardize their company’s sales and commissions. We are able to get contract data periodically, but not in bulk. If producers of contract reports can win me over on these key issues, I am ready to jump in with two feet. NAR publishes a pending contract index and frankly, not many people I know believe the results.

In other words, contract data is the Holy Grail, but I am not convinced it’s yet achievable as a reporting tool.

Now give me a sales contract specific to the appraisal we are working on and I am happy ’cause that’s a whole ‘nother story.


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[Solid Puff Piece] Goldman Research Note Clouds Manhattan

January 13, 2009 | 1:43 am | |

On Thursday there was a widely viewed and discussed research letter by Goldman Sachs covering the Manhattan housing market. Lockhart Steele at Curbed first reported it on Thursday, followed by the WSJ on Friday.

I thought Lock broke it down thoroughly — Curbed style — and there was nothing more to it. Later, I got about a bunch of emails asking for my thoughts on the research note so I thought I would take another look (since my work is part of their commentary).

I placed the full text of their research note at the bottom of this post.

Frankly, I thought the Goldman research letter was surprisingly thin, with weak logic and a bit self-serving since Goldman was the first licensee of the S&P/Case-Shiller Home Price Indices.

Some of my observations about their observations:

  • Goldman predicts housing prices will drop a total of 35% to 44% to late 1990’s levels. (Since prices have already fallen 20%, that means we are halfway there.)
  • Goldman uses the phrase “these types of arguments are difficult to quantify and are often heard just prior to a real estate market downturn” twice in this paper. Gotta love boilerplate!
  • Goldman refers to me as an analyst (dammit Jim, I’m an appraiser not an analyst! a la “Bones” on Star Trek) as in “one analyst estimated that the prices of apartments that were under contract but had not yet closed fell by 20% from August to December.”
  • Goldman criticizes the “brokerage reports” for not considering price per square foot since the firms publish mean and median prices for both co-ops and condos on a quarterly basis, but these are difficult to interpret due to significant changes over time in the size and quality of apartments being sold. Of course the report I prepare as well as my competitors’ reports all use price per square foot as a basic price metric. I was the first to do this many years ago for the co-op market.
  • Goldman alludes to one of the research companies cited as having only one year of price per square foot data. Of course Goldman forgot to mention our reports contain price per square foot data going back to 1989 broken out quarterly and annually by number of bedrooms (size) and property type (co-op, condo and 1-5 family).
  • Goldman relies on only matched price observations involving successive transactions in the same condominium for estimating the overall change in prices. This is actually a logical point. Since about 38.3% (in 4Q08) of condo sales were from new developments, using them as a basis of establishing a trend would reflect market conditions 12-18 months ago when the typical contract was signed. Any report or index that does not extract new development from the condo sales data can be as much as 12-18 months behind the market. I have found re-sale activity to be more reliable for establishing condo price trends which is something that can be captured using the CSI repeat sales methodology, despite many reservations that I have.
  • CSI continues to omit co-ops from its product suite, which represents about 75% of the housing stock in Manhattan. Which begs the question: “How do you track a housing market without 75% of the housing stock considered?”
  • Goldman uses the CSI index (which covers all of New York City, not the individual boroughs) yet analyzes income in Manhattan to establish ratios for affordability. This is perplexing to me since prices in the outer boroughs are half their equivalent in Manhattan. With the way this part was written, I get the feeling that using the CSI index was simply easier to plug into their ratios.

In short, I see this research note is more of a “puff piece” using the “faith and credit” of Goldman’s brand to hump the new Case Shiller condo index which was why I didn’t pay much attention to the Goldman report when initially released. I understand it is not a white paper, nor was it meant to be backed up by lots of footnotes and appendices. However, the fact that it was released by the gold standard of (former) investment banks, is a bit disappointing.

Here it the research note text:

We use the recently introduced S&P/Case-Shiller index for condominium prices to assess the valuation of the New York apartment market. Although housing market valuation typically has little predictive value for the near term, it is useful for anticipating longer-term moves, especially when prices are far away from equilibrium.

Indeed, New York apartment prices are very high relative to the observable fundamentals. Using three alternative yardsticks—price/rent, price/income, and affordability —we find that prices would need to decline by 35%-44% to return to the valuation levels seen in the 1995-1999 period, before the start of the recent boom.

The uncertainty is substantial. On the one hand, the picture would worsen further if per-capita incomes in Manhattan returned from their current level of 3 times the national norm toward the pre-1990s average of 2 times the national norm. On the other hand, it would brighten somewhat if jumbo mortgage rates converged toward conforming rates, perhaps because of a broadening of the Fed’s support measures. In addition, societal and demographic changes could also help, though these types of arguments are difficult to quantify and are often heard just prior to a real estate market downturn.

Following a decade-long boom, activity in the New York City apartment market is now slowing sharply. The sales reports for the fourth quarter of 2008 released on Monday by two of the largest New York real estate brokers—the Corcoran Group and Prudential Douglas Elliman—suggest that sales dropped by 25%-30% from the fourth quarter of 2007 (see “Striking Declines Seen in Manhattan Real Estate Market,” New York Times, January 6, 2009, page A20). Although the prices of closed sales were little changed from a year earlier, one analyst estimated that the prices of apartments that were under contract but had not yet closed fell by 20% from August to December. Moreover, it is well known that prices lag sales activity in the housing market, so most observers agree that both contract and closing prices are likely to decline in the near term.

Information on sales and price momentum is very helpful for predicting near-term moves in the real estate market. But in order to gauge the longer-term outlook, it is better to look at fundamental valuation indicators, such as the level of prices relative to rents or incomes, either directly or adjusted by mortgage interest rates. These types of variables don’t have much predictive power over the near term, but they start to become much more powerful at horizons longer than 1-2 years.

Until recently a fundamental analysis of the New York apartment market was hampered by the lack of high-quality price data. The various brokerage firms publish mean and median prices for both co-ops and condos on a quarterly basis, but these are difficult to interpret due to significant changes over time in the size and quality of apartments being sold. In addition, research firm Radar Logic, Inc., publishes a “price per square foot” series for the New York condo market. However, there is only a year’s worth of history, and changes in the average quality of homes sold can still distort the data even though the Radar Logic approach does control for variations in size.

But the data situation has improved dramatically with the recent broadening of the S&P/Case-Shiller (CS) repeat sales home price index to cover five of the nation’s largest condominium markets, including New York. These indexes stretch back to 1995—not as far as we would like but much better than what is available currently—and they adjust for changes in both size and quality of the condos by using only matched price observations involving successive transactions in the same condominium for estimating the overall change in prices.

Admittedly, a repeat sales index does not perfectly adjust for quality changes. In theory, the bias could work in either direction. On the one hand, wear and tear will reduce the value of a given condominium over time if the owner does not look after the property well. On the other hand, upgrades such as new flooring or a nicer kitchen may raise the value. While the CS index seeks to eliminate the influence of these factors by downweighting price change observations that are far out of line with local comparables, this is unlikely to eliminate all sources of bias. Still, we believe that a repeat sales index is far superior to the available alternatives for the purpose of measures changes in underlying real estate prices.

In analyzing the data, it is useful to look first at the raw numbers for New York condo prices. As shown in the table below, nominal prices tripled from 1995 to 2006, went essentially sideways in 2007, and have declined by about 3% in 2008. The stability since 2005 is somewhat at odds with reports from the New York real estate brokers that still show meaningful gains in mean and median prices over this period. However, we suspect that the apparent contrast is resolved by a shift in transactions toward larger and higher-quality apartments over this period, which would increase the mean and median price figures but leave the CS index unaffected.

Index

(Jan 2000=100)

Oct-95 75.3

Oct-96 75.4

Oct-97 80.6

Oct-98 89.2

Oct-99 97.5

Oct-00 111.3

Oct-01 126.7

Oct-02 144.3

Oct-03 161.2

Oct-04 188.8

Oct-05 222.6

Oct-06 227.4

Oct-07 226.7

Oct-08 221.1

Source: Standard and Poor’s.

But are the price gains sustainable? To assess this, we focus on three primary valuation measures:

  1. Price/rent ratio. We divide the CS index by the Bureau of Labor Statistics’ index of owners’ equivalent rent for the New York metropolitan area, and index the resulting ratio to 100 for the average of the 1995-1999 period. We choose this base period because it mostly precedes the recent boom but covers a period when the quality of life in Manhattan had already improved significantly from the 1980s and early 1990s. Hence, a return to the average 1995-1999 valuation level might seem like a fairly neutral assumption.

  2. Price/income ratio. We divide the CS index by the Bureau of Economic Analysis’ measure of personal income per capita, and again index the resulting ratio to 100 for 1995-1999. Although the condo price index covers the entire New York metro area, we use an income series for the County of New York (i.e., Manhattan) rather than the entire metro area. The New York condo market is quite concentrated in Manhattan; this concentration is particularly pronounced in the CS index because it is weighted by value rather than units and therefore typically assigns a much greater weight to condo sales on Fifth Avenue than in Queens. (Note that New York County income is only available through 2006; we somewhat optimistically assume that it has grown at the average national rate since then.)

  3. Affordability. Using a standard mortgage calculator and assuming both a jumbo mortgage and a 30-year maturity, we calculate (an index of) the share of Manhattan per-capita income spent on condo mortgage payments at the current level of the CS index and the current level of jumbo mortgage rates. We again index the resulting ratio to 100 for 1995-1999.

The table below shows what all three of our indicators say about the current valuation level, as of October 2008. We focus on the percentage decline in nominal condo prices that would be required to bring our three valuation measures back to the 1995-1999 average, assuming no changes in other inputs such as rents, incomes, and mortgage rates.

Price/Rent Price/Income Affordability

Required Decline* -44% -37% -35%

*In order to return to 1995-1999 valuation levels.

Source: Our calculations. See text for additional explanations.

Our indicators suggest that New York condo prices would need to fall by between 35% and 44% to return to a neutral valuation level, depending on the valuation measure we choose. Under the (admittedly unrealistic) assumption that prices decline by the same percentage in each market segment, this type of drop would imply that a 1-bedroom condo whose price currently averages roughly $800,000 would decline to $480,000; a 2-bedroom condo would decline from $1.7 million to $1 million; and a 3-bedroom condo would decline from $3 million to $1.8 million. (All these figures are approximate and are loosely based on the brokerage firms’ fourth-quarter reports.)

Since economies typically grow over time, one would normally hesitate to predict that “mean reversion” in a price/income or price/rent ratio should occur entirely via a decline in prices rather than an increase in incomes or rents. In our case, however, the assumption of flat nominal incomes and rents does not seem excessively pessimistic. In fact, it is quite possible that nominal Manhattan incomes will decline for a while. Such a nominal decline would be extremely unusual at the national level but did occur in Manhattan following the 2001 recession, which was much less severe than the downturn we are currently seeing.

In fact, it is instructive to consider the potential implications of a return of relative Manhattan incomes toward the national norm prevailing before the Wall Street boom of the past two decades, either because of pay cuts in the financial industry or because of a possible out-migration of affluent individuals. From 1969 to 1986, Manhattan per-capita income averaged 2 times the national average, with no clear trend. Over the next two decades, however, it grew to 3 times the national average. If incomes fell back to the pre-1986 level of 2 times the national average—and if national per capita income remained unchanged—prices would need to fall as much as 58% to return to the 1995-1999 price/income ratio. (The 58% drop is calculated as the 37% drop shown in the table assuming constant income, plus the 33% drop in per capita incomes, minus a term for negative compounding.)

So is there any hope for the New York apartment market? Apart from a dramatic turnaround in the city’s economic fortunes, the most plausible story is a drop in jumbo mortgage rates. So far, jumbo rates have not benefited much from the recent decline in mortgage rates, but this could change if the Fed (presumably in conjunction with the Treasury) decided in the course of 2009 to broaden its support from the conforming market to the private-label mortgage market. To make an extreme assumption, if the jumbo mortgage rate fell from the current 7% to 5%, this would reduce the “required” price decline from 35% to 19%. Of course, this assumes that affordability is the only measure that matters for home prices and there is no role for the “raw” price/rent or price/income ratio, and that Manhattan incomes stay at 3 times the national average.

In addition, it could be that societal and demographic changes will keep New York apartment valuations above the levels that prevailed in earlier periods. For example, one might argue that the memory of high crime rates was still fresh enough in 1995-1999 to make this period an excessively pessimistic benchmark. If crime stays low during the current economic downturn, perhaps Manhattan real estate will retain its higher valuation in coming years. Alternatively, one might argue that the aging of the baby boomers will continue to support the New York market as “empty nesters” want to live closer to the city’s attractions. These types of arguments are difficult to quantify and are often heard just prior to the start of a real estate downturn, but they do underscore that our analysis of the observable data on prices, rents, incomes, and interest rates only provides a very partial view of the New York apartment market.

Source: Goldman Sachs

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[Jackass Analogy] Securitization Explained

October 20, 2008 | 10:49 am |

Matrix is the blending of economics, real estate and of course, farm animals. Here’s the latest low-brow explanation of how the bailout works, as passed around that series of tubes (Hat tip to Marty).

So here goes:

Young Chuck moved to Texas and bought a donkey from a farmer for $100.
The farmer agreed to deliver the donkey the next day.

The next day he drove up and said, ‘Sorry son, but I have some bad news, the donkey died.’

Chuck replied, ‘Well, then just give me my money back.’ The farmer said, ‘Can’t do that. I went and spent it already.’

Chuck said, ‘Ok, then, just bring me the dead donkey.’ The farmer asked, ‘What ya gonna do with him? Chuck said, ‘I’m going to raffle him off.’ The farmer said You can’t raffle off a dead donkey!’ Chuck said, ‘Sure I can – watch me. I just won’t tell anybody he’s dead.’

A month later, the farmer met up with Chuck and asked, ‘What happened with that dead donkey?’ Chuck said, ‘I raffled him off. I sold 500 tickets at two dollars a piece and made a profit of $998.’ The farmer said, ‘Didn’t anyone complain?’ Chuck said, ‘Just the guy who won. So I gave him his two dollars back.’

Chuck now works for Goldman Sachs.


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Always Look On The Bright Side Of Life Housing

April 25, 2008 | 12:26 am | |

Bob Hagerty’s quarterly survey on the state of the housing market explores some positive news amid all the negativity. The article titled The Brighter Side of Housing brought to mind the Monty Python song in the Life of Brian movie: Always look on the bright side of life.. I can’t get that darn whistling out of my head.

Economists at Goldman Sachs say home prices are likely to level off by late 2009. They also point to improving affordability. Goldman’s chief U.S. economist, Jan Hatzius, says the share of a typical family’s income needed to pay mortgage payments on a median-priced home averaged about 17.5% from 1993 to 2003, before jumping to 26% in 2006. The figure now has fallen to 20% and is likely to keep declining as home prices fall.

I met Jan last year at a meeting and he pumps out some impressive research so this is something to look at.

The WSJ put together a very cool interactive table that sorts by metro area strength, change in inventory, month’s supply, price change and loan payments overdue.

I was surprised by the strength rating of Seattle given the spike in inventory over the past year as well as weak rating for New York given its low inventory levels.


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[Rebalancing Act] Always Look On The Bright Side Of Life Housing

February 12, 2008 | 2:12 pm | |

I love that Monty Python song!

Well, the Council of Economic Advisors presented their official forecast to Congress in a report and were optimistic (not surprising when you consider what their function is).

The White House stuck with the same, by now relatively optimistic, economic forecast it made last November when it released the annual Economic Report of the President to Congress on Monday.

‘I don’t think we’re in a recession,’ and the administration is not forecasting one, declared Edward Lazear, Chairman of the Council of Economic Advisers (CEA) and President George W. Bush’s chief economist.

Here’s the actual report.

Their basis is that the weak dollar offsets (higher growth of non-residential investment) offsets housing declines (lower rates of housing investment.) In fact, Treasury Secretary Henry Paulson has consistently stated that a strong dollar is a better scenario as representative of the administration’s view, yesterday the report suggests just the opposite.

I watched Edward Lazear’s appearance of CSPAN last night and he felt that the “1% of GDP” $168B stimulus plan was enough to get the economy moving again. Of course, there is already a second stimulus plan in the works so I don’t see this prediction as reliable. He feels the economy will bounce back this summer once the stimulus kicks in. After reading these excerpts, it doesn’t appear to be consistent with the discussion within the report itself:

Nationally, nominal house price appreciation slowed to a crawl in 2007, and house prices fell when corrected for inflation….

The deceleration of housing prices along with falling standards for subprime mortgages in 2005 and 2006 has led to a rising delinquency rate for subprime adjustable-rate mortgages (where the rate on the mortgages resets after an initial period), which severely disrupted the secondary market for nonconforming mortgages in 2007. In contrast, the market for conforming mortgages continued to function well.

Every major measure of housing activity dropped sharply during 2006 and 2007, and the drop in real residential construction was steeper than antici- pated in last year’s Report. Housing starts (the initiation of a homebuilding project), new building permits, and new home sales have fallen more than 40 percent since their annual peaks in 2005. The drop in home-construction activity subtracted an average of almost 1 percentage point at an annual rate from real GDP growth during the last three quarters of 2006 and the four quarters of 2007. Furthermore, even if housing starts level off at their current pace, lags between the beginning and completion of a construction project imply that residential investment will subtract from GDP growth during the first half of 2008.

During 2007, as in 2006, employment in residential construction fell, as did production of construction materials and products associated with new home sales (such as furniture, large appliances, and carpeting). Yet despite these housing sector declines, the overall economy continued to expand In addition to incomes and mortgage rates, the number of homes built is underpinned by demographics. Homebuilding during 2004 and 2005 aver- aged about 2.0 million units per year, in excess of the 1.8- or 1.9-million unit annual pace of housing starts that would be consistent with some demographic models for a decade-long period, leading to an excess supply of houses on the market. More recently, the 1.2 million unit pace during the fourth quarter of 2007 is well below this long-term demographic target. The pace of homebuilding has now been below this level for long enough that the above-trend production of 2004 and 2005 has been offset by the more recent below-trend production. Yet the construction of new homes continued to fall rapidly through year-end 2007, with the undershooting possibly reflecting uncertain prospects for house prices as well as elevated inventories of unsold new and existing homes. Once prices become firm and inventories return to normal levels, home construction should rebound, but it is difficult to pinpoint when this will occur. The residential sector is not epositive contributions to real GDP growth until 2009.

In fact, Federal Reserve governor William Poole thinks that our odds of a recession are higher but that we won’t actually enter a recession.

Jan Hatzius, chief United States economist at Goldman Sachs, wrote in a research note on Monday that he was convinced the economy was already in a recession and he warned that losses in the housing market could be even bigger than the $400 billion that Goldman predicted several months ago.

In other words, the credit crunch/housing market issues will be resolved in six months, there won’t be a recession and we won’t need a second stimulus plan.

I think more “rebalancing” is needed.

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[RPX] Residential Property Index Powered By Radar Logic To Go Live 9-17-07

September 12, 2007 | 2:23 pm | Milestones |

Radar Logic has spent the last several years working for the market launch set for this Monday, September 17, 2007.

Its been a significant effort that has resulted in the development of the Residential Property Indexâ„¢, code-named RPXâ„¢. I became involved in this venture to provide commentary and research products to leverage the proprietary technology. The real estate market information covers 25 MSA’s plus a national composite. Its exciting stuff.

Here are a few snippets from the press release:

New York, NY – September 12, 2007 – Radar Logic Incorporated (www.radarlogic.com) announced that derivatives trading in the Residential Property Index (RPX) market will begin September 17, 2007. Trading will be based on the RPX Prices, single values representing price per square foot based on actual transactions in residential real estate in 25 U.S. Metropolitan Statistical Areas as well as a 25-city composite.

Dealers licensed to offer products in the RPX market include Morgan Stanley & Co. Incorporated; Lehman Brothers Inc.; Merrill Lynch, Pierce, Fenner & Smith Incorporated; Deutsche Bank Securities Inc.; Goldman Sachs & Co.; and Bear Stearns & Co.

Michael Feder, CEO and President of Radar Logic Incorporated said, “The launch of the RPX market provides both investors and participants in the real estate industry with sophisticated tools that have not been available to them before. The granular applications of the RPX-based derivatives should allow substantial utility for all interested participants. We are excited by the reaction that professionals have had thus far.”

More announcements to follow!


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Goldman Sachs on National Housing Trends: A Potential Meaningless Epiphany

August 2, 2006 | 7:35 am | |

One of the claims by the National Association of Realtors has been the idea that in the history of recorded (adjusted for inflation) national housing prices (since the 1920’s), they have never fallen year over year. This infers to the novice that house prices do not fall and therefore are a good investment. It is a feel good statement and is true on a technical level. However, its more of a play on statistics since most local housing markets have experienced at least one price drop over the same period. Thats no surprise to most.

The NAR trend is consistent with the OFHEO nominal numbers, although OFHEO is based on a shorter time frame. It has been relied on as the safety net for justifying a home purchases for generations.

Live by the sword,
die by the sword.

In other words, these statistics show a consistent upward pattern which provides a sense of comfort even though most understand that local markets behave differently. An admittedly bad analogy here is the idea that despite the 55 mph speed limit. Some faster than others. Most do not drive 55 but its a safe number to cite.

Jan Hatzius, economist at Goldman Sachs completed a study which forecasts national housing prices to fall in the second half of 2006 or sometime in 2007 [The Chattanoogan] said:

“The risk is rising that nominal US home prices may be headed for an outright decline in 2007. It would be the first decline in national home prices ever recorded, at least in nominal terms,” said Jan Hatzius, economist at Goldman Sachs.

Now how do you explain that (assuming the forecast pans out – which I have my doubts)?

The reality here is that the stat is benign to begin with. So this trend, if it occurs, doesn’t signify anything. Yes, it illustrates a downward trend, but it is subject to the changes in the mix of properties thats sold from different regions of the country. It should never have been the basis of an investment decision to begin with.

For example, in a series of Manhattan market reports we can see the overall average sales price drop when all size categories show an increase. How? If there is a surge in smaller unit sales or a drop at the upper end of the market, the overall stats get skewed. In other words, you’ve got to look deeper rather than at the broader numbers at face value.

It will be very interesting to see if the NAR stats correlate with OFHEO’s going forward, especially if OFHEO’s stats show a drop in the near term. Either way, there will be a lot of explaining to do.


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The Blip: Housing Starts Up, Building Permitting

June 21, 2006 | 12:01 am | |

The Commerce Department released their new-home construction stats which showed a 5% increase in May over April, but starts are still 3.8% below last year. Building permits were 8.5% below last year’s pace.

Total housing starts rebounded from a 13-month low to increase 5.0 percent in May as builders worked down a backlog of unfilled orders under unusually good weather conditions. Issuance of new building permits fell by 2.1 percent, continuing the moderate downslide from the peak last September.

Download the press release [pdf]
View regional charts [macroblog].

There is some concern that too much good news will prompt the Fed to take stronger inflationary measures [WaPo] than it has in the past.

However, this news didn’t strike me as particularly good. Is it really inflationary to have housing starts rise as sales are slowing and inventory is rising? That doesn’t make a lot of sense to me.

I think the rise in new home construction is really blip and not the beginning of a trend [NYT].

Economists had expected the rate of construction on new homes to increase only marginally from April to May, according to a survey by Bloomberg News. So the latest figures were somewhat surprisingly strong.

“After three months of large single-digit declines, a rebound was to be expected,” Goldman Sachs economists wrote in a research report today. “The one we got was larger than expected, but certainly not enough to overturn the idea that housing is in a contraction.”

If the Fed interprets this to mean the economy is inflationary, then housing will suffer further with more rate increases. This rise really shows that more housing is being produced during a period of rising inventory and falling demand.

In other words, this isn’t a sign of anything positive.


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The Fed Observes The Europeans: What To Do With Housing?

March 1, 2006 | 12:01 am | |

With Bernanke’s stewarship of the Fed underway, I have wondered if the Temple was paying short shrift to the impact of the weakening housing market on economy. Comments made by Bernanke seemed to indicate that housing was doing just fine. Everyone knows (who follows the real estate market) that a change has occured as evidenced by the fourth successive monthly decline in new housing sales [BW].

In the article Fed Finds Overseas That Even Steady Home Prices May Hurt Growth [Bloomberg] the red-hot U.S. housing market showing signs of coming off the boil, Fed officials are again looking abroad for hints on what lies ahead for the U.S. This time the focus is on Australia, the U.K. and the Netherlands, where home-price advances peaked after housing booms that had significantly spurred economic growth.

The lessons learned?

  • A bust doesn’t always follow a boom.

  • Prices that are not rising – they can stay flat or decline – can have a significant negative economic impact.

What patterns were seen? Within a year and a half after markets peaked in the Netherlands, Australia and Britain, prices in all three had stagnated, hitting homebuilding, consumer confidence and spending.

  • Britain – prices rose 20% in 2004 and have remained flat since.

  • Australian – prices peaked in 2003 and have remained flat since.

  • Netherlands – prices peaked in 2000 and have remained flat since.

Economic growth in these countries was about half within a year after the housing markets cooled.

Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, says the Fed might have to take similar action. He forecasts U.S. economic growth will slow to 2.6 percent next year from 3.4 percent this year. The Fed, he says, will stop raising its target rate when it gets to 5 percent and will lower it a full percentage point next year to cushion the economy from the fallout of the housing slowdown.

If his theory sounds vaguely familiar…
A Weakening Economy (If It Is), Has The Makings Of A Refi Boom In 2007 (If It Does) [Matrix]

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A Weakening Economy (If It Is), Has The Makings Of A Refi Boom In 2007 (If It Does)

February 8, 2006 | 12:02 am |
Source: Charles Atlas

In Peter Coy’s insightful post Will Housing Make Bernanke Cranky [BW], he discusses Goldman economist Jan Hatzius [BW] argument that the “soft landing” that has been described more times than can be legally be allowed will provide a significant drag on the economy, to the point where the Fed may actually be forced to drop rates in early 2007. Hatzius expects a full 1% cut in rates at that time.

The argument goes: housing is overvalued in many markets, construction will slow, stalling GDP growth and less people will pull cash out of their homes for spending.

However Bernanke may be reluctant to react too soon after taking over from Greenspan, which makes a case for the 2007 argument for change. Perhaps we can bank another refi boom like 1993, 1998 and 2004? Seems a little too soon for that to me.

Whats been amazing about this recent housing boom, is how the housing market has seemed to come out on the plus side after each economic condition gets thrown at it. With the supposedly weakening economy and build up of inventory, and if Hatzius’ assumptions play out, 2007 could be yet another good year for mortgages, boosting sales and refi’s. A rate drop would be key for that to happen though.

Perhaps I am seeing the glass as half full a little too much these days.


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