Posted by Jonathan J. Miller -Thursday, February 23, 2012, 5:49 PM 1 Comment
In one of the greatest column names ever devised during the illustrious history of the New York Times known as “The Appraisal” [wink], Elizabeth Harris, pens “Amid a Subway Project’s Dust and Noise, No Complaints About the Rent” about the war zone that is Second Avenue on the Upper East Side of Manhattan. I was on vacation when this was published earlier this week and I was forbidden to bring my laptop.
I was approached to try to take a stab at measuring the impact of the Second Avenue subway construction on the local housing market. Listen to the blasting.
Sales transactions move too slowly to capture the neighborhood impact since this is a relatively recent event of the past few years. So I looked at rents since they are smaller and more nimble.
Methodology
I divided a portion of the Upper East Side neighborhood into three zones (East 64th Street to East 96th Street) as follows:
The blocks to the east and west of Second Avenue (Third Avenue to First Avenue)
The blocks to the west of Third Avenue (to Fifth Avenue)
The blocks to the east of First Avenue (to East River)
I analyzed all the properties collected during our production of the The Elliman Report: Manhattan Rentals that actually rented in 2010 and 2011 and compared them. In a rental housing market that is seeing sharp gains in rents in the past year, I thought it would be interesting to see if there was a material difference in direction between the subway “zone” and everywhere else. I was only looking at “face” rents (the rent paid before deducting concessions) because I have more of that data.
And there was a difference.
In fact, the subway zone showed a 1.7% decline in median rent year-over-year, a 3.2% increase to the west and a 2% increase to the east. And the number of rentals in the subway zone increased 9% while the areas to the west and east fell 5.1% and increased 2% respectively over the same period suggesting that increased affordability may be attracting tenants.
Construction was supposed to be completed by 2016, but now it looks like 2018 or longer.
A gigundo transfer station…
[Courtesy: NYT]
…and trucks carrying explosives [Turn your head to left when viewing photo]…
[Courtesy: NYT]
While I was on vacation, I was contacted by Eyewitness News to discuss my numbers on camera but that wasn’t possible – although the online story includes no mention of the source of the results, the video did provide proper credit.
Thoughts
As time moves closer to completion some buyers may benefit from upside given how unpleasant some blocks are right now. The construction will likely provide downward pressure on housing prices in the near term but those along the zone will likely catch-up and perhaps even benefit from the transportation upgrade.
As a general rule, neighborhood property values tend to be higher in the west and lower in the east. It’s also possible that the price midpoint may shift further to the east than it is now once construction is completed.
Location specifics aside, additional subway access to and from the neighborhood should prove to be a tremendous asset to property owners in that area over the long run.
Posted by Jonathan J. Miller -Monday, January 30, 2012, 8:42 AM 1 Comment
One of the last pieces of the 2009 Fannie Mae/Cuomo agreement, called HVCC, that essentially (but unintentionally) destroyed the bank appraisal industry is being worked out. A consumer hotline was created to handle complaints about real estate appraisals. These calls are being be directed to the appropriate state licensing board for action.
I’m all for giving people a way to fix a wrong, but there are a few things wrong with the hotline concept (all bark and no bite):
The states have no additional money to manage their compliance/license departments. Usually a handful of people oversee a profession of thousands of licensees with constant turnover.
Many states have syphoned off much of the licensing fees to other departments relegating many licensing departments as merely revenue sources.
How does a state deal with an appraisal complaint effectively? Do they say your adjustments for view wasn’t high or low enough? You can see how challenging it is for them.
How are the frivolous complaints weeded out? I understand many states have advisory committees from the industry to help process the paperwork but it is a conceptual nightmare.
Our firm has had a handful of complaints directed to the state over the years by individuals who didn’t get what they wanted from our services. Here are a few representative examples:
A mortgage broker tried to use the appraisal of a property that we had appraised for both parties in a divorce and demanded we make changes to the report including change the client name so he could use it for a refinance by one of the parties (we are prevented by the licensing law to do this) and filed a complaint against us. He threatened us with a dozen phone calls to make the change he wanted and that he “knew people” of influence. The matter was dropped by the state once they received our response.
A doctor who was buying out a partner of their joint practice looked to us to appraise the real estate. We did so. We found out later from our client that we had appraised the value at a similar amount as the other partner’s appraiser did (we didn’t know the other side got an appraisal or who did it). Our client filed a complaint because he claimed the “real” value was triple (of course!) The only justification in his mind (he provided no supporting sales data) was using a square footage estimate by a real estate broker saying the space was about 75 square feet larger than we measured (it was a few thousand sq ft) so we “must” have been conservative because that 75 square feet would have tipped the scale and tripled the value [sarcasm]. The matter was dropped by the state once we explained.
There are more examples like this but you get the idea – it is the cost of doing business today for an appraiser.
I see hotlines or complaint lines as they are currently handled as a way for erroneous complaints to occur and burden the profession with excessive costs. Yet I believe this is an important function but needs to be handled much more vigorously and intelligently to protect the public but there is no money to do so. Until state governments recognize that effective oversight preserves the integrity of the profession and ultimately keeps overall financing costs lower, then nothing will change. In fact, with the onslaught of the appraisal management company phenomenon of recent years, I’d say the prospect of improvement is nearly impossible.
Case in point, the hotline concept hasn’t kept the massive appraisal management company competency fraud from entering day to day conversations i.e. the common “the appraiser came from 3 hours away and had never been in our market before”.
In America, the accused are innocent until proven guilty but in the private sector, the small business bears the unending burden of cost for frivolous actions because government generally does not have the resources or understanding of how destructive it can be.
Posted by Jonathan J. Miller -Monday, January 23, 2012, 8:55 AM Comments Off
Ok, at least it’s it’s Year of the Dragon, not the Year of the Rat but the Chinese New Year does bring to mind some other associations with housing in the post-credit crunch world.
Here are names I have associated with each year since the fall of Lehman and the impact on housing.
2008 (Rat) – Year of the return to reality. Appropriately named, the year notes the final punctuation mark on the credit boom unraveling and the fact that the entire world lost it’s mind.
2009 (Ox) – Year of the first time buyer. The first year after the September 2008 fall of Lehman Brothers that marked the beginning of a new credit environment as well as a new housing market. Mortgage rates fell to the floor and the Federal government introduced the first time homebuyer tax credit – later expanded to existing homeowners. For appraisers it was the “Year of the Appraisal Management Company” as the Cuomo/Fannie Mae agreement effectively prevented the residential appraisal industry from becoming a reliable and impartial benchmark provider.
2010 (Tiger) – Year of the short sale. Preceding the incoming flood of foreclosures, the banking industry understood that it was a lot cheaper to effect a short sale rather than go to foreclosure. Unfortunately they had no idea how to manage the process and many fell into foreclosure. Here’s some free advice to banks looking to cut losses on foreclosure activity: actually pick up the phone.
2011 (Rabbit) – Year of the foreign buyer/trophy property sale. The DC politically charged debt ceiling debate leading to the S&P downgrade of US debt and economic debt problems in Europe drove many foreign buyers to the US housing market as a safe haven. A byproduct of this trend was a surge in the sale of unique high end properties in the US. Think Candy Spelling and Sanford Weill. I had originally dubbed 2011 as “Year of the foreclosure” but the “robo-signing” scandal in late 2010 tempered servicer/lender plans of releasing foreclosures into the market until they were more confident they could prove ownership and the right to actually foreclosure (what a time we’re living in).
2012 (Dragon) – Year of the foreclosure/election year do-nothingness. Servicers/lenders will begin to ramp up the foreclosure process again as more time has passed for them to get their ducks in a row. I am doubtful there was enough time to do much of anything considering the millions of potential transactions but it’s likely to start this year and heavier than usual volume should last for at least 3 years. This is a good thing because we need to clear the market before claiming a housing recovery. We will likely see a surge in election year political promises as an attempt to help troubled homeowners such as a more streamlined shortsale process, an improved loan modification process and an expanded refinance policy, but judging from all feeble attempts so far and the stalemate in DC on economic policy and their stunning lack of understanding about what ail’s housing, we’ll probably get the status quo instead.
The next Chinese New Year will be named Year of the Snake. Uh, I’ve never liked snakes.
Posted by Jonathan J. Miller -Monday, January 9, 2012, 6:00 AM 1 Comment
Ok, so I thought my son shooting a basket would be better than a boring graphic of the Fed – indulge me. I’ll say “the Fed took the ball drove and took a well executed shot.” Ok, back to the Fed’s sort of full court press…
From the FT: Finally, a regulatory body offers tangible realistic advice on housing to Washington policy makers:
Among the ideas is forming a national strategy to facilitate the conversion of foreclosed properties into rentals; allowing banks to rent their repossessed homes rather than forcing lenders to sell them; changing the compensation structure for mortgage servicers, companies that collect payments from borrowers and pursue foreclosures in the event of a default; creating a national online registry of liens to track ownership interests; and altering existing Obama administration policies to allow for more refinancings and mortgage restructurings.
The insight was provided to the Financial Services committees (who brought us Dodd-Frank) and while much of this has already been considered or is in the works, it’s presentation by the Fed all in one message helps bring clarity.
I like these ideas since they are foreclosure-centric and US housing doesn’t recover until we clear the market of excess foreclosure volume.
Here’s the Fed’s white paper - what jumped out at me came in the beginning with the fed identifying housing as a key economic problem:
a persistent excess supply of vacant homes on the market, many of which stem from foreclosures
a marked and potentially long-term downshift in the supply of mortgage credit
the costs that an often unwieldy and inefficient foreclosure process imposes on homeowners, lenders, and communities.
I really like the rental idea for REO houses stuck in lender inventory. In many cases, lenders are forced to sell so they don’t fall below their capitalization requirements by the regulators. Now they would be able to rent the property out to get the cash flow going plus having an occupant helps protect the asset.
Here’s a crazy and too simplistic but-it-sounds-like-a-reasonable-foreclosure-failure-spiral:
Home sales are weak because credit is so tight
The rental market is strong because credit is tight – rents are rising.
Consumers have less disposable income to help the economy because rents are high.
As more rental supply becomes available from Fed recommendation, renting becomes more affordable.
More affordable rents delay increase of home sales.
Sales of new single-family houses in October 2011 were at a seasonally adjusted annual rate of 307,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 1.3 percent (±19.7%) above the revised September rate of 303,000 and is 8.9 percent (±17.2%) above the October 2010 estimate of 282,000.
The median sales price of new houses sold in October 2011 was $212,300; the average sales price was $242,300. The seasonally adjusted estimate of new houses for sale at the end of October was 162,000. This represents a supply of 6.3 months at the current sales rate.
Two things I get out of this report:
1. No context
The chart and the ups and downs of the past 2 years seem wildly out of scale with the past.
2. No reliability of the data
Let’s take this sentence:
“This is 1.3 percent (±19.7%) above the revised September rate of 303,000 and is 8.9 percent (±17.2%) above the October 2010 estimate of 282,000.”
and translate it (bad grammar aside):
“October 2011 new home sales were anywhere from 18.4% less than last October to 21% more than last October. October 2011 new home sales were anywhere from 8.3% less than September 2011 to 26.1% more than September 2011.”
Conclusion
Not very useful or reliable but easy to make fun of.
Posted by Jonathan J. Miller -Wednesday, November 16, 2011, 12:38 PM 5 Comments
Like the term “sale” in discount retail stores, the term “market value” in valuation gets misused on a regular basis. In fact I’d characterize some of the misuse as manipulation.
I think of market value in housing as some sort of perishable fruit or vegetable. It has a limited shelf life of reliability.
The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.
Then of course there are many other uses that are thrown into the same caldron of confusion:
Appraised value – the value on an appraisal report
Investor value – value of the property is to a specific individual or entity – not necessarily market value
Fair market value – an accounting term, “old school” market value name and commonly used within the legal system
In layman’s terms let’s talk about how “market value” is being misused.
When a home is properly exposed to the market (listed so buyers can see it in a reasonable period of time), it sells in the marketplace for its value as of that moment.
Market value isn’t precise
Hence my problem with a Zillow “Zestimate” where the presentation is an exact number for the value of a home i.e. $257,532. Perhaps that’s why this tool has long been buried in their web site after being so prominent on their home page after launch. I have never heard of a housing market today that has that kind of precision. If I appraise something for $500,000 and it sells for $505,000 or $495,000, I was spot on the money so to speak.
I see market value of a home as some sort of “range of gray” that I am comfortable with given what I know about the housing market that the property sits within and how its amenities are considered in that market.
One sale does not make a market
As crazy as it sounds, we appraised a Manhattan transaction a long time ago where the buyer was in a 5 way bidding war of a multi-million dollar listing and offered $2M above list “to avoid the stress of a bidding war and get the property they wanted.” They knew they over paid but it was worth it to them. Was this sale price a new benchmark for market value? Of course not yet it was what someone was willing to pay. That’s investor value to the buyer, but not an establishment of market value. It was worth it to them, not the market (wouldn’t we all love to be the seller in that situation?).
During the dot com boom more than a decade ago, there was a townhouse in downtown Manhattan that was purchased by a newly minted dotcom type for $12M, about 2x the market level at that time as I recall (and that was generous). That sale actually seemed to slow down the high end market for a few years within the neighborhood as sellers continued to point to that sale as establishing “market value.” As a result, many overpriced listings sat for extended periods of time until reality sank in. The sale’s impact on the market eventually dissolved and the market returned to sanity.
Posted by Jonathan J. Miller -Monday, October 31, 2011, 12:27 PM 2 Comments
[click to open index]
The USD Index tracks a basket of currencies measured against the US Dollar. The USD Index includes the currency of our trading partners including the Euro, Japanese Yen, British Pound, Canadian Dollar, Swiss Franc and Swedish Krona.
This past summer, the participation of foreign buyers seemed unusually strong. However the USD Index spiked in September and then weakened again but not to the summer lows. This may take some of the wind out of the “sales” (sorry) for foreign buyers in Q4.
There was a nice summary of the foreign buyer phenomenon last Friday in US News and World Report by Meg Handley:
Internationally oriented sales amounted to $82 billion for the year ending in March, according to the most recent data from the National Association of Realtors, about 8 percent of total U.S. sales and $16 billion more than the same period last year.
The bill, if passed, as well as the weak US Dollar, are not the ultimate answer to the housing mess but clearly the solution is going to be comprised of many items, rather than one big idea.
Posted by Jonathan J. Miller -Tuesday, October 25, 2011, 6:30 AM Comments Off
Former economic adviser to President Obama Dr. Larry Summers pens an opinion piece in the Washington Post: “How to stabilize the housing market“.
I can’t decide why this was submitted to Wapo since it offers no solutions to stabilize the housing market. Should be renamed “here are some of the problems with the housing market.”
Some feel he’s made our credit problems worse by derailing Obama’s economic strategy. Here and here is a two part podcast with Barry Ritholtz that contains some very choice words for Dr. Summers.
When I first read Summer’s piece I was reminded of Steve Martin’s line on SNL (way back in 1978) where he offers some sage advice on “how to have a million dollars and never pay taxes”:
“First, get a million dollars, then…”
The observations he makes are not new and not insightful beyond basic conventional wisdom. I continue to be amazed at how disconnected the very smart DC econoliteri are from what ails housing.
“First, banks need to lend, then…”
He says:
First, and perhaps most fundamentally, credit standards for those seeking to buy homes are too high and too rigorous.
Second, as President Obama stressed in rolling out his jobs plan, there is no reason that those who are current on their GSE-guaranteed mortgages should not be able to take advantage of lower rates.
Third, stabilizing the housing market will require doing something about the large and growing inventory of foreclosed properties.
Fourth, there is the issue of preventing foreclosures, the initial focus of housing policy efforts. The right way forward is far from clear.
Here are my observations to these 4 points:
First – Banks have to be incentivized to lend and ease underwriting standards. The problem with Washington establishment is they have been begging and pleading for banks to lend since the crunch began. THIS WILL NOT WORK. Banks don’t want to, primarily because of the low rate policy held by the Fed. No real spread and tough to equalize the risk between borrowing from the Fed for free and a higher risk proposition with Joe and Mary Homebuyer.
Second – Yep. Low rates don’t do anyone any good if you can’t get a mortgage. That’s what is happening now. It’s all credit access, baby.
Third – Five years of elevated REO activity coming. Its not going away and housing won’t recover until it clears the market. Our government resources can’t stop this. They aren’t large enough.
Fourth – Uh, yes its a complex problem.
NOTICE TO THE WASHINGTON ECONOMIC POLICY ELITE
Create economic incentives to lenders and problems slowly go away. Housing won’t recover without credit repair. Incentivize lenders to lend. Asking doesn’t work. Focus on the banks and they will in turn help the consumer. Don’t bypass the banks and go directly to the consumer since that’s not a sustainable fix.
Late into the Depression, 10% down lending returned to the market with government incentives and helped housing recover more quickly. You don’t starve a recession and feed a boom. Washington’s still got it exactly backwards.
Eliminating certain risk-based fees for borrowers who refinance into shorter-term mortgages and lowering fees for other borrowers;
Removing the current 125 percent LTV ceiling for fixed-rate mortgages backed by Fannie Mae and Freddie Mac;
* Waiving certain representations and warranties that lenders commit to in making loans owned or guaranteed by Fannie Mae and Freddie Mac;
Eliminating the need for a new property appraisal where there is a reliable AVM (automated valuation model) estimate provided by the Enterprises; and
Extending the end date for HARP until Dec. 31, 2013 for loans originally sold to the Enterprises on or before May 31, 2009.
HARP (Home Affordable Refinance Program) was created in 2009 to help borrowers take advantage of low mortgage rates even if they had no equity in their homes. It was not effective so the restrictions have been expanded.
Of course this provides no help to borrowers with jumbo (non-conformining mortgages) in high cost housing markets who have have the same issue. I find it wildly unfair that there continues to be a bias to high cost housing markets effectively keeping a large number of middle class borrowers out of this program.
One of the big problems with HARP as initially set up was that the lenders were resistant to participating because of “buyback risk” if original underwriting was flawed (it could be argued that nearly ALL underwriting was flawed during the boom).
Posted by Jonathan J. Miller -Monday, August 15, 2011, 11:40 AM 3 Comments
My friend Barry Ritholtz over at the Big Picture does a nice overview of where housing needs to go and how we need to create an economy to sell off vacant homes, not rent them.
He says “Drift Lower” Is best-case scenario for housing. In NYC, which is one of the better US housing markets, I have been saying for more than a year that “move side-ways” is the best-case scenario for housing in the region.
Had a fun interview with Tom and Sara this morning on the always MUST watch/listen Bloomberg Surveillance. We talked housing, rentals, vacancy and inventory. An added bonus was the addition of Adam Davidson – co-founder and co-host of Planet Money... Read More
In one of the greatest column names ever devised during the illustrious history of the New York Times known as “The Appraisal” [wink], Elizabeth Harris, pens “Amid a Subway Project’s Dust and Noise, No Complaints About the Rent” about the war zone that is Second Avenue on the Upper East Side of Manhattan. I was on vacation when this was published earlier this week and I was forbidden to bring my laptop.
