Posted by Jonathan J. Miller -Monday, March 12, 2012, 9:45 AM 1 Comment
I saw this TV ad and I liked the message – it struck me as the way real estate brokerages should have been talking about the housing market long ago. Don’t speak about it as an investment like a stock pick, but soft sell it as an experience. Coldwell Banker gets it right. The Tom Selleck connection didn’t hurt either.
It initially caught my attention because it was a tongue-in-cheek valuation approach:
You start by taking the smell of pancakes made on a Sunday morning and times that by the sound of kids laughing from the bottom of their bellies. Then you add the taste of a good cabernet with family at Thanksgiving and multiply that by the warmth of a winter fire. Then you subtract the stress of work and minus the struggles of the outside world, add the power of a bedtime story and times that by the square root of a grandmother kissing her grandchild. Multiply all this by about 50,000 memories and 100,000 smiles. And then you have a value of a home.
Apparently all those appraisal courses I’ve taken over the years were for naught.
“People’s homes are so important because they are the setting for life’s most meaningful moments,” Michael Fischer, chief marketing officer for Coldwell Banker, said in a news release. “While the economics of homebuying are critical, we must remember there is much more to it: lifestyle, memories, family and pride of ownership.”
During the housing boom and bust, real estate messaging lost its way.
He was certainly part of the problem and I thought history would not be kind to his legacy of running a Fed that led us to two historic bubbles in stocks and real estate. The points being raised are akin to staring at the hood ornament of your 1991 Buick Roadmaster Estate Wagon while driving – and why so many economists and political types missed the eventual housing fail. They didn’t look ahead to the on-the-ground behavior of everyone connected to the housing process.
The piece begins with debunking the conventional wisdom that low mortgage rates were the problem and suggests that monetary policy was not loose. Perhaps the title of the piece has little to do with the point the author is trying to make. However it’s like NAR Research press releases whose titles scream statements that have little to do with the body of text that follows – it becomes worthy of pointed criticism.
While it’s undeniable that rock-bottom mortgage rates — at least rock-bottom for the pre-2009 world — helped fuel the subprime frenzy, it’s not true that these low rates meant monetary policy was excessively loose.
The Federal Reserve as an institution did not understand the housing run up as it was happening or when it began to crack. Think “contagion.“
So while we can argue that “tight policy” and low rates don’t mean monetary policy was “easy” all day long, that’s some sort of top level wonkiness that does not excuse Greenspan’s role. The author misses the progression of events interlaced with Greenspan’s presence which goes something like this:
Gramm-Leach-Bliley set the stage for bringing Wall Street into mortgage business.
Greenspan maintained a hands off policy on regulatory oversight claiming the markets would self-regulate (later admitted this was wrong).
After 9/11, the Fed pressed rates to the floor and held them there for more than 3 years.
Housing prices ramped up in response to low rates.
Wall Street was hungry for mortgages to repackage and sell.
Prices rose rapidly and affordability fell creating a volume problem for lenders – so in order to keep the mortgage pipeline full, underwriting standards evaporated.
Greenspan continue to ignore the unprecedented housing price run up nationally and the reckless risk management of commercial banks.
The housing bubble burst roughly two years later as affordability could not be goosed any more by absence of bank lending standards (which Fed has some responsibility for oversight).
So perhaps he didn’t maintain a loose monetary policy as the author insists, but that has little to do with whether Greenspan was part of the problem that created the housing boom and bust. The man acknowledged he was and yes, he clearly was.
Posted by Jonathan J. Miller -Tuesday, February 28, 2012, 6:15 AM Comments Off
There was an interesting paper discussed in the NYT Economix Blog that was just released called “Housing, Monetary Policy, and the Recovery” that provides some context to understanding how much housing is preventing a more robust economic recovery.
What is interesting about this research is the idea that not only did the economy get crushed by the housing crisis, but the fact that the recovery is being delayed because of the legacy of bad lending decisions that created the run-up in housing prices.
Low interest rates just aren’t cutting it anymore – in order to gain traction with the consumer, the study indicates that rates would have to be inverted – that lenders would need to pay borrowers. Crazy.
The pace of recovery since the financial crisis has been less than half as fast as after the last two major recessions, which ended in 1975 and 1982. In first 10 quarters after those recessions, the economy grew by 13.4 percent; in the wake of this recession, the economy grew by only 6.2 percent.
And, the paper says, “more than half the underperformance in this recovery is associated with housing-related sectors.”
No shortage of charts in the paper – here’s a couple that jumped out at me:
A lot has been made about the “class warfare” sniping between presidential hopefuls in the current campaign. It’s unfortunate, but as it relates to housing, the disparity is somewhat alarming.
For this week’s New York Times real estate cover story, For Sellers, High End Is Hot, I was asked to back up my statement:
“There is a greater disconnect between the very top of the market and everything else than I have ever seen in my 25 years in the business,” said Jonathan J. Miller, the president of the appraisal firm Miller Samuel.
I sliced up the Manhattan apartment market in 20 (5%) equal segments for 1991, 2001 and 2011 by median sales price and compared the top 5% with the bottom 5% after adjusting for inflation.
And guess what? The spread between the top 5% and the bottom 5% is getting wider, a lot wider:
10 years (2001-2011) +12.5%
10 years (1991-2011) +66.2%
20 years (1991-2011) +87%
The data shows that the gap expanded more significantly during the Dotcom-related housing boom of the late 1990s and then continued in the aughts (00’s) with the credit boom. In many metro area markets and affluent suburban towns across the US, this same phenomena can be seen.
An advertisement for Powerball “Yeah, That Kind of Rich” on a phone booth (now that’s a weird contradiction) that I photographed (to the right) says it all. At least we can all aspire to own a Porsche Panamera – by itself in left lane – love that car!).
After the collapse of Lehman in 2008 and the collapse of the secondary mortgage market for jumbo (non-conforming) loans, there was great concern over the health of the high end of the market. Less access to financing or more difficult mortgage underwriting for jumbo mortgages became the norm because jumbo lenders had to hold these loans in their own portfolio instead of offloading them to investors representing the Icelandic banking system or Wisconsin school districts.
And there should have been concern. The credit crunch has adversely impacted the high end luxury market.
However I am not talking about the high end or luxury market in this analysis. I am speaking to the market that is above it.
I am really talking about the “super” or “luxe” or “ultra” (or insert your own hyperbole) high end market and the top few percentage points of markets they represent. Trophy properties are in demand right now. The buyers are paying cash and demand is high.
Meanwhile the balance of the housing market is mundane, sliding or stabilizing, grappling with bad lending decisions during a period where everyone lost their rationale mind.
Right now is an exciting time to be “trophy-hunting”, housing-wise.
Posted by Jonathan J. Miller -Monday, November 21, 2011, 3:03 PM Comments Off
My friend Barry Ritholtz penned an especially terrific column published in WaPo back on November 5th “What caused the financial crisis? The Big Lie goes viral.” that is worth reading if you haven’t. And apparently many have since there are several thousand comments/social media shares associated with it.
He lays it all out for us. Here’s my favorite part:
Here is the surprising takeaway: They are winning. Thanks to the endless repetition of the Big Lie.
A Big Lie is so colossal that no one would believe that someone could have the impudence to distort the truth so infamously. There are many examples: Claims that Earth is not warming, or that evolution is not the best thesis we have for how humans developed. Those opposed to stimulus spending have gone so far as to claim that the infrastructure of the United States is just fine, Grade A (not D, as the we discussed last month), and needs little repair.
Wall Street has its own version: Its Big Lie is that banks and investment houses are merely victims of the crash. You see, the entire boom and bust was caused by misguided government policies. It was not irresponsible lending or derivative or excess leverage or misguided compensation packages, but rather long-standing housing policies that were at fault.
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 -Thursday, August 11, 2011, 2:54 PM 1 Comment
I saw this in The Real Deal and felt compelled to comment in their post because the rationale was so utterly ridiculous. This must have been a PR placement segment for the bank.
Yes mortgages are cheap and house prices are low so affordability is at record levels – but banks currently have the tightest mortgage underwriting requirements in decades. Consumers aren’t blind lemmings following the media off a cliff.
Here’s my comment on the blog post:
Seriously, this has to be the lamest reason ever given for a weak housing market. When you run out of reasons, the fall back is to blame the media. With low interest rates and lower housing prices, the crisis of confidence is all about bank underwriting standards. Keeping a 20% down policy has nothing to do with why consumers have low confidence. According to the Fed, residential credit has remained tight, if not tightened. Why? Because unemployment is stuck in the 9’s, Fannie/Freddie are in flux and now the financial markets are volatile. The “crisis of confidence” comes from banking’s about face on mortgage financing. Give the consumer some credit (pun intended) for having some intelligence. Good grief.
“Crisis of confidence” comes from a consumer not being able to get a mortgage or refinance to take advantage of low rates and low prices. Crisis of confidence comes from consumers watching the economic events unfold without any competent leadership, only containing high stakes political brinksmanship.
Let’s say we get past the age old “blame the media for everything” rationale?
Posted by Jonathan J. Miller -Tuesday, August 9, 2011, 11:01 AM 8 Comments
S&P downgrade aside, one of the things that is very apparent today: banks aren’t excited about mortgage lending and credit isn’t easing keeping the pressure on the housing market. To be clear, credit has slowly begun to ease in many sectors except for residential lending.
Banks continue to require AAAAAAA quality residential mortgage applicants and they are few and far between.
But banks are in the business of lending so why does credit remain so tight?
Despite the bank bailouts in our post-credit crunch world, a compromised Dodd-Frank financial reform law and a host of pro-banking hat tips from Washington in the name of stabilizing the financial system, lenders are still not compelled to lend.
For the past two years it has been nothing less than surreal to hear the political establishment beg banks to lend, plead with them to ease their underwriting standards, cajole them to modify existing mortgages, try to be more flexible with short sales, attempt to be more hands-on with foreclosures. All this posturing after they (the federal government) had bailed the banks out. Crazy.
Bailouts and government stimulus aside, who can blame the banks for being reluctant to lend? They are confronted with a legacy of bad or non-existing underwriting standards from mid-decade that they know all too well – because they created it.
At the same time, the Federal Reserve continues to provide near 0% free money to lenders in order to “prime the credit pump” by keeping interest rates artificially low. The hope is to stimulate the economy by providing lenders with access “free” money to lend and “enjoy the spread.”
It sure looks like banks are faced with an economic choice that the Fed and Washington doesn’t seem to understand:
Banks can…
a) issue mortgages at 4% to borrowers who are face:
Unemployment stuck in the 9’s % with more layouts to come – little improvement expected over the next few years.
Housing prices sliding in many markets.
GDP slipping, a weakening economy with rising concern about a “double dip.”
A tidal wave of foreclosures that have been held back as a result from the “robo-signer” scandal last fall.
or….
b) borrow money for free from the Fed, invest and make 4% virtually risk free.
“b” seems like a fairly obvious choice, no?
Mortgage rates remain at record lows yet the housing market remains weak. Low mortgage rates aren’t helping the housing market anymore. Low mortgage rates are the problem. Sure home affordability declines as mortgage rates rise, but rates are at record lows and the economy is sliding and the housing market remains stuck.
The missing ingredient for a housing recovery is consumer access to credit, NOT low mortgage rates.
Let mortgage rates rise to their natural levels so lenders will be incentivized to lend and credit will ease. Until the Fed changes its view, there is no incentive for banks to change their behavior and housing will continue to suffer.
