The S&P Case Shiller Index was a released just as I came on the show, as well as what is driving the Brooklyn housing market, why is NYC fairing well, what ails the national housing landscape, will it have further to fall, what are the problems with relying on CSI, foreign buyers and whether Tom is looking at a kick up in his rent next year. Always fun.
Posted by Jonathan J. Miller -Monday, September 12, 2011, 6:00 AM Comments Off
I’ve always viewed the rental market as a leading indicator for the purchase market since rentals are more reactive to changes in the economy than sales are. Rental demand is generally strong across the US right now.
Does this mean higher demand for sales is close behind? No.
The increase in rental demand is not because the economy is improving, it’s because credit is so restrictive right now and getting tighter.
The angle to the rental market story is that people who are unable to sell their home are considering renting them out until the sales market improves. What’s unique in this cycle is that higher quality homes are now on the market for rent causing people on the fence between purchase and rent to consider renting since the available product is of a higher quality.
A friend of mine just sold his big house in our town and decided to rent for a year and look for a smaller home. When he was looking for homes to rent, the market was very tight…just what homeowners want to hear.
A few weeks ago the reporter for this segment, Jeanne Yurman, called me when I was hunkered down in my town library when we lost power at home the day after Irene. Being a good reporter, she “outed” me for using the hurricane as an excuse to work from home since, as it turns out, she lives in my hometown and was perfectly able to go to work in Manhattan. LOL. We had a good laugh about that. On Friday she interviewed me for this segment a few blocks from my house.
To look at the markets following of both events, I assessed how each economic shock impacted sales activity of Manhattan co-ops and condos, which account for roughly 98% of the Manhattan single-unit residential market. I compared both event timelines by using a three-year window. I track quarterly closed sales, and they lag contract signing by an average of 45 days at that time — but you get the general idea.
One important similarity between the two periods: Both were already influenced by recessions, whether people were aware of it at the time or not.
Sept. 11: The housing market was already sliding down that slippery slope as sales activity weakened and marketing times expanded. The go-go market created by the tech boom in the preceding few years was unwinding and prices were beginning to soften, especially at the upper end of the market. Access to credit remained reasonably accessible, unlike today.
In the weeks that followed 9/11, the housing market was a virtual ghost town with little contract activity. A well-known brokerage firm issued a press release saying that prices had fallen 30% overnight, but I took issue with that claim since there were essentially no sales to measure the market — a classic mark-to-market situation. That press release was subsequently withdrawn.
When the Federal Reserve pushed rates to the floor shortly after the attack and mortgage rates fell sharply, consumers responded. We observed a surge in demand firsthand about five weeks after the attacks — the market restarted at the entry-level priced apartment segment. This was made clear to me when we were engaged by a bank to appraise the purchase of a one-bedroom apartment in the East 50s in a non-doorman building. The contract was signed after a five-way bidding war. Soon we were seeing many such bidding wars and the market began to boom from the bottom up.
Lehman: Sales activity in the housing market peaked in 2007 and prices peaked a year later in 2008. Sales activity was erratic in 2008 leading up to Lehman but the trend was clearly weakening. The slowdown actually began during the summer of 2007 when the mortgage system started to break down. When American Home Mortgage collapsed and the two Bear Stearns hedge funds famously imploded during that summer, the pace of the market began to cool. By the time Lehman went under (and Fannie Mae, Freddie Mac and AIG were bailed out at nearly the same time), the consumer and mortgage lenders went into the fetal position and waited.
Unlike the 9/11 timeline, the Manhattan housing market took nearly two years to reach levels seen in September 2008 and have not come close to peak sales levels reached in the two years prior to the credit crunch (obviously because artificial credit conditions were in place). Unlike the months following 9/11, residential mortgage credit has continued to remain unusually tight and has in fact tightened since the beginning of 2011. Hard to rally the consumer when the Fed continues to keep rates too low for banks to be incentivized to lend.
Leading up to 9/11 a lot was done to reduce oversight of commercial lending, neutering regulators and allowing investment banks step into the mortgage process. The Fed kept rates rock bottom through June 2004, fueling an unprecedented housing boom. Prices were rising so quickly in the first half of the decade that affordability waned and banks removed all underwriting standards in order to keep the pipeline full as Wall Street off-loaded the risk to investors across the globe.
Of course, it all ended badly, marked by the Lehman bankruptcy.
Posted by Jonathan J. Miller -Saturday, August 20, 2011, 11:15 AM Comments Off
A primary news service in Brazil, Jornal da Globo, interviewed me on the housing market and I did a quick overview of the 2008 and laid out the US part of the story. If you blink you might miss me but its a balanced story and it seems to me like Brazil is in year 2006 of our cycle.
[click to see video]
The reporter told me that their economists and regulators say they are not in a bubble. However consumers have easy access to credit and there has been double digit multi-year housing growth far outpacing rental prices. That’s a housing bubble, no?
Incidentally, the day before this interview I was interviewed by a Chinese Television station with a similar story but less optimistic about the state of their market – saw it as a bubble.
I spoke with Erika Miller (no relation but we went to the same junior high and high school!) does a solid segment on housing market’s shadow inventory (properties that are not listed for sale yet), triggered by the CoreLogic report.
RealtyTrac reports much more in the foreclosure process. CoreLogic’s takeaway is that shadow is declining but it will take 5-10 before those levels return to normal – moving in the right direction but there is a long way to go. This is also consistent with what RealtyTrac has been saying.
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