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Posts Tagged ‘Pending Home Sale Index’

[Not Really Counted] 1.7M Units In Shadow Housing Inventory

December 22, 2009 | 1:04 am | |


[click to open full report]

One of the by-products of the credit crunch has been the rise in shadow inventory. Within my own market stats, I consider shadow inventory all units that are complete or under construction but not yet offered for sale as condos (sometimes as cond-ops or co-ops). In many cases the developer was unable to sell the initial block of units offered and is therefore unable to release the units behind them.

The development stalls because the lender behind the developer usually prevents the units to be converted to rentals because the value of the project would fall considerably as a rental on their balance sheet, causing stress to their capitalization ratio.

The lender’s reluctance to make such a decision is referred to as:

  • pretend and extend
  • pray and delay
  • kick the can down the road
  • a rolling loan gathers no loss

First American CoreLogic tracks shadow inventory. They define shadow inventory as real estate owned (REO) by banks and mortgage companies, as a result of foreclosures and other actions, such as deeds in lieu, as well as real estate that is at least 90 days delinquent. They put the amount of shadow inventory at $1.7M in 3Q 09, up 54.5% from $1.1M a year ago.

Visible inventory, like the amount estimated NAR and Census every month, is estimated at $3.8M, down 19.1% from $4.7M last year.

The total unsold inventory (which combines the visible and pending supply) was 5.5 million units in September 2009, down from 5.7 million a year ago. The total months’ supply was 11.1 months, down from 12.7 a year earlier. This indicates that while the visible months’ supply has decreased and is beginning to approach more normal levels, adding in the pending supply reveals there is still quite a bit of inventory that will impact the housing market for the next few years, especially in the context of the current increase in home sales, which is in part due to artificially low interest rates and the homebuyer tax credit.

In other words, even with the surge in activity over the past several months, total inventory hasn’t changed all that much (I agree with Bob).

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[NAR] Pending Home Sales Up 6.4%, 7 M-O-M Increases

October 1, 2009 | 1:03 pm | |

Contract activity another way to track housing trends although it’s reliability is fraught with risk since it is a much smaller data set and therefore subject to skew, especially on a local level. However, on a national level (as far as that goes) it is the only index of this kind we have.

From Reuters/NYT:

Pending sales of existing U.S. homes rose sharply in August, for a seventh consecutive month of gains, reaching the highest since March 2007, data from a real estate trade group showed on Thursday.

And the NAR press release:

Pending home sales have increased for seven straight months, the longest in the series of the index which began in 2001, according to the National Association of Realtors®.

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in August, rose 6.4 percent to 103.8 from a reading of 97.6 in July, and is 12.4 percent above August 2008 when it was 92.4. The index is at the highest level since March 2007 when it was 104.5.

[Recommendation to NAR] – contracts are not “forward looking” but rather they are “current looking.” Housing futures indexes like Case Shiller are designed to be “forward looking.” PHSI is forward looking as far as it relates to closed sales but not as a way to predict the future market trend in real terms.

Here are the raw PHSI data points.

Seven months of m-o-m seasonally adjusted contract sales activity is certainly encouraging, especially because it is an index of sales rather than prices. Honestly, in light of what is happening on the foreclosure front, I am not sure what this run of good news actually infers. br clear=”all”>

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[Sentiment versus Confidence] Dow Jones Sentiment Index Shows Improvement

August 31, 2009 | 11:20 pm | |

Confidence is more right here and now. Sentiment is more forward looking (it gives a snapshot of whether consumers feel like spending money.)

(a lame appraisal analogy would be estimated market value for a bank appraisal (today) versus anticipated sales price for a relocation appraisal (future))

but I digress…
I continue to be amazed with the types of analysis being done with the subjective nature of what is on the consumer’s mind – or in this case, what journalists are writing about:

The Dow Jones Economic Sentiment Indicator

The ESI, which was first published in April, aims to identify significant turning points in the U.S. economy by analyzing coverage of 15 major daily newspapers in the U.S.

The Dow Jones Economic Sentiment Indicator bottomed last November and has continued to edge higher. Newspaper coverage has become more upbeat about the economy (I assume they assume that consumers are sick of reading about bad news), the number of articles expressing either positive or negative sentiment about the economy has fallen now to approaching a third of the level of its peak in October 2008 following the collapse of Lehman Brothers.

A lot of people are drinking the Kool-aid right now.

I find this particularly ironic since the real estate industry has long blamed “the media” for the making real estate correction worse by “piling on.” However, I find the coverage today to be overly positive from sloppy interpretation of the 4 housing price indices: Case-Shiller Index, NAR Existing Home Sales, Commerce Dept’s New Home Sales and FHFA HPI, showed positive signs.

Actually all indices showed less negative results which were discussed excessively positive.

For example, The Conference Board’s recent Consumer Confidence Index was a little more positive:

Consumers’ assessment of current conditions improved slightly in August. Those claiming business conditions are “bad” decreased to 45.6 percent from 46.5 percent, however, those claiming conditions are “good” decreased to 8.6 percent from 8.9 percent. Consumers’ appraisal of the job market was more favorable this month. Those saying jobs are “hard to get” decreased to 45.1 percent from 48.5 percent, while those claiming jobs are “plentiful” increased to 4.2 percent from 3.7 percent.

While the recent Michigan Sentiment Index showed renewed weakness:

Confidence among U.S. consumers unexpectedly fell in August for a second consecutive month as concern over jobs and wages grew.

The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 63.2, the lowest level since March, from 66 in July. The measure reached a three-decade low of 55.3 in November.

I find the whole thing a bit foggy especially using monthly figures for comparison.

Further reading on this.


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$8,000 Tax Credit + Low Mortgage Rates = Cash For Clunkers

August 4, 2009 | 8:01 pm | |

The Cash for Clunkers Program seems to be working…the kind of clunker you can live in.

For the fifth consecutive month, the number of signed contracts was higher than the previous month – this figure is seasonally adjusted so the increases are not due to the spring uptick.

NAR does not share it’s sample size and therefore why they present this metric as an index so I am always wary of a data set we don’t know the size of. Contract data is less prevalent than closed sales across the markets they cover so its a non-random sample by definition and therefore full disclosure is needed. But still…

The results are encouraging and supports the concept that if homes are priced correctly, they will actually sell. Buyers are out there.

I suspect a portion of the increase is a combination of the release of pent-up demand that caused people to freeze in their tracks at the end of last year, plus record low mortgage rates, lower home prices and the coming expiration of the $8k tax credit all played a part.

My concern is that the pace of foreclosures is expected to rise and there hasn’t been a “cash for clunkers” equivalent for the housing/mortgage market.

At the same time, personal income dropped 1.3% from last year, the largest drop in 4 years.

A weak labor market is one reason economists say a rebound in housing will be slow to develop. The unemployment rate, which reached a 25-year high of 9.5 percent in June, may exceed 10 percent by early 2010, according to the median forecast of economists surveyed by Bloomberg last month.

Housing trends are more likely to follow employment and income trends and this is good news. However, it doesn’t mean the keys has been turned in the ignition.

Still, it’s better than a “start.”


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[NAHB] 26% Of Appraisals Faulty While AMC’s Talk Parrots

July 14, 2009 | 12:53 am | |

NAHB regroup on the HVCC/Appraisal issue from after a very silly press release a few weeks ago to a more coherent message in the to the current press release [FAULTY APPRAISAL PROCESS HARMING HOUSING AND THE ECONOMY} which has more stats.

Twenty-six percent of builders are seeing signed sales contracts fall through the cracks because appraisals on their homes are coming in below the contract sales price, according to a nationwide survey conducted by the National Association of Home Builders (NAHB).

“Home builders are increasingly concerned that inappropriate appraisal practices are needlessly driving down home values. This, in turn, is slowing new home sales, causing more workers to lose their jobs and putting a drag on the economic recovery,” said NAHB Chairman Joe Robson, a home builder from Tulsa, Okla.

Ok, I can relate to this but the 26% figure is much higher than I would have thought, and I see myself as an appraisal pessimist these days. NAHB essentially defines faulty as “killing the deal” which is a very thin standard, but still their argument has merit.

This press release comes on the heels of the NAR press release in the form of research that said that 37% of all realtors have had 1 or more deals blow up because of the appraiser.

Lost sales were reported by 37 percent of Realtors® attempting to complete home sales, with 17 percent reporting one lost sale and 20 percent reporting more than one lost sale.

Approximately 85 percent of NAR Appraiser members reported a perceived reduction in appraisal quality.

Although these are trade groups and are known for spinning on behalf of their members, in this case, I do believe they are right. Appraisal quality has fallen sharply and the fact that Appraisal Management Companies (AMC) being enabled by HVCC has a lot to do with that.

Here’s how the AMC trade group responds to appraisal criticism from real estate agent and mortgage broker trade groups.

Realtors and mortgage brokers say the new procedures tend to produce below-market valuations that can delay or kill pending deals. Consumers are paying for the changes in higher fees and subsequent appraisals when the property doesn’t price right initially, they claim.

Such complaints are a “gross mischaracterization” that merely parrot talking points circulated by industry trade groups, said Jeff Schurman, executive director of the Title Appraisal Vendor Management Association, itself a professional organization representing AMCs.

“The way they tell the story, it sounds like we’re a bunch of cowboys who have come on the scene to take advantage of the situation,” he said. “We’ve been around since the 1960s.”

Yes that’s true Jeff, but it became an issue on May 1 when HVCC was implemented. The 1960’s cowboy analogy is like saying the Internet has been around since the 1960s.

Technically a true statement but a wildly misleading reference (much like many AMC appraisals).


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[Snowball Pile] NAR Says Sales Higher, Blame Appraisers For Stalling Housing Recovery

June 24, 2009 | 12:38 am | |

The National Association of Realtors released their May Existing Home Sales Report today and reported:

The Realtors said that home sales rose 2.4 percent to a seasonally adjusted annual rate of 4.77 million last month, from a downwardly revised pace of 4.66 million in April. Prices, meanwhile, were 16.8 percent lower than a year ago.

That’s all well and good, but there was a new wrinkle this month. Someone to new blame for continued weakness in the housing market.

You guessed it: The Appraiser.

“We have just been flooded with e-mails, telephone calls on the appraisal problems,” said Lawrence Yun, the Realtors’ chief economist.

“Poor appraisals are stalling transactions. Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan.”

This unleashed a flood of appraisal coverage today.

The NYT’s Floyd Norris writes a great blog post on this topic called Realtors: Blame the Appraisers

ACRONYM Alert!!! AMC = Appraisal Management Company.

I was on Fox Business last night with Neil Cavuto. Don’t have the clip yet but the topic was..you guessed it…appraisers and whether we are killing the recovery.

Most of the good appraisers I know don’t work for Appraisal Management Companies nor are they getting much work from the national retail banks. Why? Because they don’t agree to work for half the market rate, crank out work in 24 hours that doesn’t allow enough time to research and cut corners because of their low fee structure.

But they likely got most of the appraisal volume during the spring mortgage boom with record low mortgage rates.

AMC’s are the unregulated byproduct of the Cuomo/Fannie Mae deal called HVCC or Home Valuation Code of Conduct. Generally, the lowest common appraisal denominator work for AMCs and you get what you pay for – usually garbage.

The likelihood of fragile deals blowing up because some out of area yahoo comes to bang out a dozen reports in one day and has no idea what is going on in the local market is likely to come in low on the value because they think that’s what the bank wants. And guess what? AMCs and the appraisers they use got most of the work during the spring.

NAR doesn’t seem to understand this – they seem to be inferring appraisers are singlehandedly stalling the housing market. Appraisers don’t all get together and say “Gee, lets all do a really bad job on our appraisals these days. It systemic. Banking wants to use AMCs. AMCs want to make a profit so they hire cut rate appraisers.

The NAHB press release today was even more silly. More on that in the next post. Like anything associated with appraisals, many know something is wrong, but they have no idea what it is.


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[Now Appraisals Are Obstacles?] Talking Out Of Both Sides Of Our Mouths

June 15, 2009 | 10:53 pm | |

The lending business has a love-hate relationship with appraisers – now appraisers seemed to be blamed for preventing the housing recovery. The following WSJ article from about a week ago has been making the rounds through the real estate world.

The orientation of those interviewed in this article come strictly from those heavily involved in the process of making deals during boom times. If someone prevents a deal from happening, they are an “obstacle.” Literally that is true, but there needs to be context applied.

Appraisals are becoming one of the biggest obstacles for Americans trying to sell their homes, refinance their mortgages or tap into home-equity credit lines.

During the housing boom, appraisers often complained of pressure from lenders to inflate home-value estimates to justify dubious mortgage lending. Now, some people in the mortgage business — and some borrowers — say the pendulum has swung too far the other way.

Hmmmm….the old on-off switch.

  • Neutral observer v. party to the transaction
  • Protector v. deal impeder
  • Watch dog v. cost center
  • Risk Management Tool v. Tool

Back in the day (I love that phrase, especially now because it is only 2 years ago), appraisers were marginalized because of our lack of organized political influence. We were treated as a commodity – like a flood certification rather than as a housing expert. Rubber stamping brought in a lot more business to those who played ball..

Valuation disputes are becoming more common now (translation: appraised value falls below purchase price).

Lenders are licking their wounds from billions in losses and the majority of appraisers, raised on a 7 year dose of housing boom, tend to more conservative about market value knowing they won’t be removed from a list because they won’t play ball. Most national retail banks are using AMCs. AMC appraisers are doing just what independent appraisers with integrity never stopped doing during the boom: estimate market value.

The problem is, many of the AMC “appraisers” (who are really form-fillers), are simply reading into the minds of their clients, and giving them what they think they want – low values. In other words, AMC appraisers are all over the map, depending on what their client wants and right now, lenders are not overwhelmingly excited about lending (measured by tightened underwriting) so these appraisers tend to be biased low – just the opposite of 2 years ago.

How about removing bias altogether and estimate market value?

The appraisal management company (AMC) phenomenon, which delivers some of the worst elements to the valuation process, enables legions of inept appraisers to thrive.

Kris Berg, a real estate agent in San Diego pens a perfect picture of the robotic nature of AMC appraisers and lack of competency when meeting them at the inspections for property sales. That’s because most lenders have found the AMC religion and appraisals are being ordered in conveyor-belt fashion, rather than matching up the appraiser with the assignment.

Here is one quote in the article that is absolutely ridiculous and speaks for the AMC phenomenon:

Jeff Schurman, executive director of the Title/Appraisal Vendor Management Association, said AMCs typically take about 40% of the fees and appraisers get the rest. Mr. Schurman said he has seen no evidence that AMCs’ practices lead to lower quality.

This trade group continues to claim the average fee is 40%. My experience and my colleagues rule of thumb is about a 50% discount in fees or more. Put that aside and consider this real world translation:

If you posted a job listing at a company for $100k over the past several years. Due to budget cuts, you offered the same position, when it became vacant at $60k. And hundreds of companies did this, do you think the experience and educational backgrounds of the majority of applicants would be exactly the same in either salary scenario?

Yet that’s the message being conveyed by Title/Appraisal Vendor Management Association. As Warren Buffet once said, “Never ask a barber if you need a haircut.”

Good grief.

Kris Berg and many good agents like her are seeing the adverse impact of AMC appraisers first hand. After all we have been through, the appraiser function as it relates to lending remains as it was, unreliable.


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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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[In The Media] Bloomberg TV On The Economy 1-6-09

January 8, 2009 | 1:03 am | | Public |

Sorry for a matrix devoid of much content for the past few weeks. Ever had days where you can’t cram in one more thing no matter how hard you tried? Well, that’s not what happened to me. I was on staycation.

Kathleen Hays anchors the show On The Economy. This time she did a remote interview from DC where she was attending an economic forum. She’s one of the best.

About 3 feet to my left was another anchor to jump into the interview in case the remote connection was dropped. Also, I was speaking into a camera in front of a huge glass window with about 50 school kids on tour pressed to it looking at me. Think of a basketball player shooting a foul shot and screaming fans are behind the backboard trying to distract.

Fun.

I was commenting on the NAR pending home sale stats.

The Pending Home Sales Index fell 4% to 82.3 for the month of November, to its lowest level since the series began in 2001, according to the National Association of Realtors (NAR). That’s a drop from a downwardly revised reading of 85.7 in the month of October.

Its a short series (since 2001) and frankly, I am skeptical that pendings were down only 4% from the prior month and that was a lot more than the 1% projected by economists? And how could pendings be down only 5.3% from the same period last year? It should be more like 25% – 50%, no? I simply don’t believe this metric.

Kathleen was trying to get me to project how much further the market in Manhattan was going to decline but I didn’t bite. How can you forecast any housing market decline until stabilization of credit occurs? Until then, all bets are off.

Here’s the clip.


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[Sounding Bored] Fighting The High Value, Getting Fired Over The Right Value

July 16, 2008 | 12:15 am | | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession.

The following IndyMac story was forwarded to me by a Soapbox reader. It was originally posted by appraiser Vernon Martin on AppraisersForum.com I don’t usually repost but the story detail is amazing – read here or on the appraisersforum.com – either way, it’s worth the read.

Written by Vernon Martin:

I worked at IndyMac as their chief commercial appraiser from October 2001 to the end of March 2002.

I first became acquainted with IndyMac through OTS appraisal examiner Darryl Washington, MAI. Darryl used to examine my appraisal department each year when at Home Savings of America, which was acquired by WAMU in 1998. During the summer of 2001, I had a chance encounter with him at a jazz concert. I asked him what he had been up to, and he told me that he had just completed the first examination of IndyMac Bank, which had just received its savings and loan charter only a year before. He said, “Vern, they could use a guy like you.”

Several weeks later I saw the chief commercial appraiser position for IndyMac Bank posted on Monster.com. I responded with a cover letter that started with “Darryl Washington of the OTS suggested that I contact you.” Apparently, that was the right way to start the letter. IMB’s chief credit officer called me soon, asking “do you know Darryl Washington?’ I said “Yes, he examined my department annually at Home Savings.” His next question was “Do you know how to deal with him?” I assured the chief credit officer that I was used to dealing with the OTS and Darryl and that I could get IMB into compliance with OTS appraisal regulations.

After 3 interviews, IMB wanted me to start right away, because the OTS was returning in November. I started on 10/15/01 and had a month to familiarize myself with their commercial lending practices until the OTS showed up.

At the end of my first week, there was an urgent need to field review an appraisal of a subdivision in the Sacramento area. I went up there on the weekend, but also took along some other recent appraisal reports from the Sacramento area. One of the other appraisal reports concerned me. A residential subdivision had been appraised as “80% complete”, but when I visited it, it had only been rough-graded, probably no more than 15% complete. When I returned to the office on Monday I asked who the construction inspector was for that region. I was told that there were two inspectors for the Sacramento area; one was CEO Mike Perry’s father and the other one was Mike Perry’s father-in-law. The loan officer on the deal was Mike Perry’s younger brother, Roger, who had recently been hired. His previous experience had been as a cop. Thereafter I heard of favoritism towards relatives of Mike Perry and “FOMs”, and the chief credit officer advised me to take special care of Mike Perry’s brother. (“FOM” was IndyMac jargon for “Friend of Mike”.)

I reported my Sacramento findings in a private memo to the chief credit officer, who then distributed it to the senior managers at the construction lending subsidiary known as the Construction Lending Corporation of America (CLCA). The senior credit officer from CLCA, the manager who most resembled Tony Soprano, was the one to call me. He asked “Are you sure you saw what you said you saw?” in a rather chilling manner. He said he had been on site with Roger Perry and had seen things differently. After that call, I asked the chief credit officer why CLCA’s senior credit officer would want me to recant my report. He told me that the senior credit officer received sales commissions for every loan made, which seemed to me like a blatant conflict of interest.

All appraisals were ordered by the loan officers from a list of approved appraisers maintained by LandAmerica. I was not allowed to order appraisals, but I recognized many names on the LandAmerica list as well known, reputable appraisers. What I began to observe, however, was that loan officers were learning which appraisers were more “flexible” than others. My areas of concern were extraordinary assumptions, lack of feasibility analysis, and false information given to appraisers.

As an example, I read an appraisal of a vacant, former Costco warehouse which had been purchased for $2 million several months before, but was appraised for $17 million based on a fabricated rent roll composed of tenants that had never signed a lease or a letter of intent. Only one tenant actually moved in. I told the loan officer that I could not accept the appraisal report, as it was hypothetical. He wanted me to approve it, any way, with the understanding that no funds would be disbursed until the prospective tenants could be verified. I told him that I wasn’t going to approve a hypothetical appraisal. The loan was funded, any way.

My only substantive encounter with CEO Mike Perry was in November 2001. I was summoned late to an impromptu meeting of senior executives in the board room. When I arrived, the meeting was already underway. The tone of the meeting was very different than senior executive meetings at other companies I had worked for. Mr. Perry, a man in his thirties, was spinning ideas and executives who were 10 or 20 years his senior were behaving like “yes men”, competing to agree with his ideas. There were lots of raised hands and enthusiastic participation. He seemed to be enjoying this, in an immature, megalomaniacal way.

Then he turned to me with an idea. He asked me if I, as the chief commercial appraiser, had the regulatory authority to change the discounted cash flow models in each subdivision appraisal, which might have the effect of changing appraised values. I said that I could possibly do it, but why? He smiled and said “Don’t housing prices always go up?” (Was he really too young to remember the early 1990s?)

I told him that it wasn’t a good idea, because we were already hiring competent appraisers who had more local knowledge than I had. Unless I could show that their analysis was flawed, it would be inappropriate for me to change the appraisals. That answer seemed to anger him. At the end of the meeting, the chief credit officer tried to introduce me to him, but he turned his back on me.

I later learned that Mike Perry was hired as CEO of IndyMac at the age of 30 when it was spun off by Countrywide. He had been an accountant at Countrywide and a protégé of Countrywide founders David Loeb and Angelo Mozilo.

When the OTS arrived mid-November, my review duties were handed over to LandAmerica. I was to spend full time responding to findings from OTS examiner Darryl Washington. In the ensuing month it became increasingly obvious that the main reason I was there was to refute OTS findings and serve as window dressing for an institution that scoffed at or was wholly ignorant of federal regulations. Many, if not most, of the senior executives had come over from Countrywide, which was an unregulated mortgage bank.

One of the craziest violations of OTS regulations was underwriting loans based on appraised values well above purchase prices. For example, a prominent Sacramento developer purchased a piece of land for $18 million, a price most reasonably supported by the comps, but it was appraised and underwritten at a value above $30 million, the rationale being that this developer added value to the property just by buying it. This does not satisfy the USPAP and federally accepted definition of market value, however. The appraisal firm was the same one used for the supposedly 80% complete subdivision.

I was present at several confrontational meetings between the OTS and FDIC examiners and CLCA executives. It seemed that IMB was intent on refuting every finding and using me towards that end. I was criticized for not arguing enough with the examiners.

After the examination was over, there was an unsolicited appraisal report waiting for me on my desk. A piece of land next to an airport had recently been purchased for $24,375,000 and was almost immediately appraised for more than $65 million based on the owner’s plans to build an airport parking lot. This was three months after September 11th, 2001 and average parking lot occupancy at this airport had declined from 73% to about the low fifties. The appraisal lacked a sales comparison approach and its feasibility analysis was based on pre-September 11th data. The feasibility analysis was done by the same consultant who caused the city of Los Angeles to lose millions on the parking garage at Hollywood and Highland. The appraisal was done by an unapproved appraiser who had previously caused my previous employer, Home Savings, to set up a $17 million loan loss reserve on a hotel he appraised for $450 million and the loan defaulted within a year. The report was delivered less than a week after it was ordered by the IMB loan officer, leading me to suspect that it had already been completed for someone else, most likely the borrower. I told CLCA executives that I could not accept the report and that I considered it to be biased. I tried to get the appraiser to change the report, but he immediately called the chief lending officer, who must have then instructed him to ignore my request.

Despite my stated objections to the appraisal report, the chief lending officer told the Loan Committee that I had ordered and approved the appraisal, and they funded a $30 million loan. Thereafter, there was sustained pressure on me to approve the report. I responded that I would have to write my own report, since the original appraiser would not make changes. This bought me time. Meanwhile, the airport, who had previously owned 80% of the parking spaces in the area, was suing the developer and erected a fence to keep people from walking from the parking lot to the terminals.

The chief lending officer also pressured me to accept another unsolicited appraisal of a Sacramento-area subdivision. This report was based on an “extraordinary assumption” that a road led to the subject property. When I went up to Sacramento to see the property, there was no road.

In January I went to Sparks, Nevada, to review an appraisal of the last phase of a condominium project. The first phase, with condos on the golf course, was a success, but the last phase was on the opposite side from the golf course and actually sloped below grade. The appraiser made an $8000 downward adjustment for each unit, and I questioned whether $8000 was adjusting enough. That provoked warnings from several executives, including the chief credit officer. The developer was buying the land from David Loeb, IndyMac’s Chairman of the Board (and co-founder of Countrywide), and I was warned that challenging this deal could get me fired. Soon after, the chief credit officer came to my office with a representative from human resources to announce that my initial 90-day probation would be extended for another 90 days, as CLCA executives had complained about my lack of cooperation with them. The HR rep had a look of horror on her face the whole time he delivered this message.

I finally finished my own airport parking lot appraisal report in late March, the same week that the Bush Administration laid off most of the OTS examiners. I don’t know which event precipitated my termination. My appraisal of the airport parking lot estimated the stabilized value at $37 million in year 2003 and the value upon completion as $31 million in 2002. These appraised values were considered insufficient to support the $30 million loan.

IMB gave me two weeks’ notice of my impending termination and offered me $25,000 severance pay if I turned over all documents and signed a non-disclosure agreement. I told them that state law required me to keep records of all of my appraisals and reviews, and that $25,000 was not enough. After a few days of seeing that I was not cooperating, I was summoned to a final meeting with the chief legal officer and “chief people officer”. A written statement indicated that I was being terminated for having a “communication problem”. I asked for examples of my communication problem, but none were presented. (I later recounted, during a deposition, that I was left alone with the chief legal officer for a few minutes of awkward silence. I then asked him, “Doesn’t it bother you that I am being fired for a communication problem without any evidence against me?” He said, “Not at all.” This cracked up my attorney.) After the meeting, I was escorted back to my office by a large security guard to collect my personal belongings, and then I was escorted out of the building, with my toothbrush in my left hand and my toothpaste in my right hand.

During these last days I contacted OTS about the abuses going on at IMB and said I had documentary evidence. They flew in to Burbank to meet me and they debriefed me for a couple of hours. They were upfront about how the flow of information had to be one way, from me to them, and not vice versa. I had to call my friends at IMB to find out how OTS was responding. The OTS paid a special visit to IMB and called for an internal audit to investigate my allegations. The first audit was considered a whitewash, and the OTS called for a re-audit. Interestingly enough, there was even a document produced that supposedly indicated my approval of the appraisal of the “80% complete subdivision”.

The second audit corroborated most of my allegations and the OTS called for certain personnel changes. The president and senior credit officer of CLCA were ousted; the chief lending officer had his loan approval privileges removed. Chairman of the Board David Loeb suddenly and coincidentally retired at the same time. He died 5 months later.

Interestingly enough, at about this same time, I read in the press of IMB receiving a “corporate governance” award from some organization, for having an impartial and effective board of directors. Meanwhile, CLCA executives selected my replacement, someone who they had already wanted since even before I started at IMB.

I had an excellent attorney. Besides suing for wrongful termination, he showed me that I could actually sue for discrimination. Many states, including California, have laws that prevent discrimination against employees who are upholding public policy, which was the very reason that got me fired. Other bank appraisers should take note of this. USPAP and OTS appraisal regulations are public policy.

In interrogatories sent to IndyMac during the litigation, they were once again asked to demonstrate evidence of my “communication problem”. The only evidence provided was a memo from me about a borrower “trying to deceive us” and a memo from a loan officer complaining that I actually called Union Pacific Railroad concerning one of his deals, a subdivision being built close to a railroad right-of-way. I was told by the loan officer that the track was no longer used, but Union Pacific disclosed to me that it was still being used once a day during the evening hours.

Interestingly enough, in the six months of unemployment and underemployment which followed my termination, I rented many videos, one of which was “The Insider”, the real-life story of Dr. Jeffrey Wygand, who blew the whistle on the tobacco industry to Sixty Minutes and was also fired, coincidentally, for having a “communication problem.”

Most of this information is already publicly disclosed in my lawsuit, filed 7/15/02 in Los Angeles Superior Court, Case Number BC277619, for anyone wanting further details. As for the results of that lawsuit, the only thing I can legally say is that “the matter has been resolved to the mutual satisfaction of both parties”.


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[Smoking Gun Crack] Signs Of Housing Recovery

July 14, 2008 | 10:15 pm | |

In a lapse of judgement, poor writing or an irrational need to be contrarian, the normally solid publication Barrons (I subscribe) drops the ball on their cover story:

Bottom’s Up: This Real-Estate Rout May Be Short-Lived

If IndyMac, Fannie and Freddie didn’t steal the headlines over the weekend, I wonder if this article would ever made it to print.

The article suggests housing is moving toward recovery based on a review of recent data:

  1. NAR exisitng homes have a 10.8 month supply in May versus a 11.2 month supply in April (ahem: Seasonality occurs in rising and falling market. Home sales rise in the spring.)

  2. Case Shiller showed prices rose in 8 of 20 housing markets in April, and the pace of decline is slowing in many of the cities surveyed. (see no. 1)

  3. Treasury Secretary Paulson recently said: “”we are well into the adjustment process.” (This is a political move to allay investors – other than that, what does this statement actually mean?)

  4. David Blitzer, chairman of the S&P Index Committee indicated the media was only interested in the “…bad year-over-year number.” (blame the media observation – see no. 1.)

  5. Pending Congressional bailout. FHA will reposition $300M in subprime mortgages. (For perspective, Fannie and Freddie have 5 trillion in outstanding mortgages, how does this save the market? It’s a drop in the bucket).

  6. Fannie and Freddie may be taken over by the government is a good thing. (no it’s not)

  7. A million unit drop in housing starts has signified the end of the last 3 housing corrections. (none of those period saw anything close to the speculation and poor lending practices seen the recent boom – no lessons learned by history here).

  8. Affordability (via price/income) has improved with price declines. (The rationalization for increased affordability is pretty silly since underwriting standards are much tighter. In other words, if your credit score and salary didn’t change from last year, and your home dropped in value, your buying power is probably much lower. In other words, affordability did not increase despite the mechanical calculations to the contrary).

  9. NAR reports 2% increase in co-op. condo and townhouses from April to May. (See no. 1)

  10. NAR economist Lawrence Yun is actually relied on in this article. (He called the credit crunch temporary last August and the housing market would return to normal in the fall.)

  11. Mortgage market weakness is front end loaded with foreclosures and defaults. (In theory the bad is behind us – for the life of me, I can’t understand the rationale. How does this mean housing is poised for a turn if the scope of the credit crunch is unprecedented?)

Good grief.


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[Seasonal Sensibility] Isn’t It Supposed To Get Better In The Spring?

May 21, 2008 | 12:20 am |

Housing markets are seasonal, blah, blah, blah, blah, blah.

Its May so we would expect the housing activity would be higher than it would be say in January. The weather is warmer, the birds are chirping, Lawrence is saying things are great. So whats the problem?

You need to compare the current housing market with the same period in the preceding year or years.

Is June better than December in terms of sales activity and price trends? How about May versus January?

Using this logic, these articles seem a little light.

Yet in markets like Sacramento County, median sales price is down 40% since August 2005. As Andrew Leonard in his column writes:

A 40 percent drop. If those are the kinds of numbers required to goose the market back into action, the entire economy still has a lot of pain coming.

However, I like the decline from peak comparisons, so disregard my argument for using seasonality. I am either hot or cold on it, depending on the weather.


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