[92Y Tribeca] The New World of New York City Rentals with Curbed.com

Posted by Jonathan J. Miller -Monday, July 27, 2009, 10:57 PM
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I’m really looking forward to this one.

Lockhart Steele, blogfather of Curbed invited both me and CEO Dottie Herman of Prudential Douglas Elliman to talk rental market at the 92Y Tribeca this Thursday.

The New World of New York City Rentals with Curbed.com [92Y Tribeca]

I hope you can join us.

Case-Shiller Index: 18.7% Becomes 18.1% = Market Falling, Just Not As Much

Posted by Jonathan J. Miller -Tuesday, June 30, 2009, 2:54 PM
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Here’s a cool WSJ interactive map on the results and here is the official CSI press release.

The general media coverage focus on the April S&P Case Shiller numbers talks a lot about the 3rd consecutive month of the ease in the rate of price declines. But the jobs outlook slipped, sapping consumer confidence.

An interesting, and in my view, likely housing double dip may be seen in the Case Shiller Index caused by performance differences in the bottom and and top half the the market.

Here’s the 20-city breakdown:

While the Case Shiller Index isn’t a tool to price specific property or markets, it shows macro trends and does a lot to set consumer housing market psychology.

Here’s Shiller’s interview on Fox Business today (I was interviewed by the same anchors about 30 minutes later on the issue of HVCC) talking about his new trading tool for housing. Mike at Altos Research does a brilliant job explaining how the new ETF works.

[The Housing Helix Podcast] Noah Rosenblatt, UrbanDigs.com, Real Estate Broker, Day Trader

Posted by Jonathan J. Miller -Thursday, June 25, 2009, 11:00 PM
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I speak with my good friend Noah Rosenblatt, creator of the award winning Manhattan real estate economics blog UrbanDigs.com, Manhattan real estate broker and former day trader.

Check out the podcast.

You can subscribe on iTunes or simply listen to the podcast on my other blog The Housing Helix.

[Damp Squib?] Financial Regulatory Reform Is Sort of Here

Posted by Jonathan J. Miller -Tuesday, June 16, 2009, 11:47 PM
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A phrase that’s being thrown around lately, damp squib.

The phrase “damp squib” has since come into general use to mean anything that fails to meet expectations. The word “squib” has come to take on a similar meaning even when used alone, as a synonym for dud.

Because this will take a year to enact through legislation, I wonder whether it will be relevant when the final version in place? Banks will probably be stronger. Wall Street will be in somewhat better shape. Still, I am hopeful this will be a productive effort, given the lack of effective regulation that enabled a whacked out credit environment.

On Monday, Timothy Geithner, secretary of the Treasury and Lawrence Summers, director of the National Economic Council wrote an Op-Ed piece for WaPo called A New Financial Foundation. Here’s the conclusion:

By restoring the public’s trust in our financial system, the administration’s reforms will allow the financial system to play its most important function: transforming the earnings and savings of workers into the loans that help families buy homes and cars, help parents send kids to college, and help entrepreneurs build their businesses. Now is the time to act.

The administration has been working hard to develop a plan.

The earlier vision was a super agency and the elimination of a number of existing agencies that overlap each other. Turf wars continue to be a real issue.

Tonight, the administration released the details of the plan to revamp the financial regulatory system, one of many aspects of the financial system that didn’t function.

Here’s the white paper on the plan.

The Obama administration last night detailed a series of proposals that would involve the government much more deeply in the private markets, from helping to steer consumers into affordable mortgage loans to imposing new limits on the largest financial companies, in a sweeping effort to prevent the kinds of risk-taking that sparked the economic crisis.

The plan is an attempt to overhaul an outdated system of financial regulations, according to senior administration officials.

It would vastly increase the powers of the Federal Reserve in an effort to create stronger and more consistent oversight of the largest companies and most important markets.

It also would create a new agency to protect consumers of mortgages, credit cards and other financial products.

I’m hoping something constructive comes out of this and not simply more regulation. This is being done in the name of prevention, and has limited impact on the current situation in the housing/mortgage/credit markets.

I can’t over the feeling that we will end up creating regulations for what we went through rather than where we are going.

[Vortex] Commercial Grade: A Quarter Century of Cap Rates (a commercial appraiser’s dream!)

Posted by Jonathan J. Miller -Monday, June 15, 2009, 6:00 AM
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Guest Appraiser Columnist:
John Cicero, MAI, CRE, FRICS

John provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. He is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is, depending on what day of the week it is, one of the smartest guys I know.
…Jonathan Miller

Bob Knakal, Chairman of investment sales brokerage firm, Massey Knakal Realty Services, recently released an excellent commentary on a 25-year history of the New York City multifamily market. Using actual sales data from 1984 to the present (including cap rate data from 2005 to 2008 compiled by my firm, Miller Cicero, LLC).

In addition to examining historical cap rates and gross rent multipliers over time, the report analyzes cap rates relative to mortgage rates and the yields on 10-year T-bills. An excerpt:

From 1994 through 1999, we saw slow steady declines in cap rates, with slightly positive leverage and risk premiums within a range of 100 to 250 basis points…Throughout the 25 years of this analysis, this period was the most stable-and I attribute this stability directly to the very disciplined lending practices of debt providers.

It’s actually fascinating (at least for a commercial appraisal nerd like me!) to see how many NYC multifamily property was routinely purchased with negative leverage (i.e. at cap rates below mortgage rates. In fact the past five years has been the biggest period of negative leverage buying since the mid 1980’s. However, with the more stringent underwriting now in place, the NYC multifamily market seems poised for another (surprisingly rare) period of positive leverage.

[Seeing only 70% of the Risk] Fannie Mae Crushed Condo New Development Sales

Posted by Jonathan J. Miller -Sunday, March 22, 2009, 11:40 PM
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The future of condo new development sales activity across the US appears in serious trouble, yet it doesn’t have to be that way – and its all due to a new government agency, Fannie Mae.

Back in September 2008, when the wheels were coming off the economic wagon, the US Treasury bailed out the former GSEs Fannie Mae and Freddie Mac (and AIG). It was the end of an era where both enterprises served two masters: the US taxpayer (exposure to risk) and its shareholders (profits and share price), to simply serving the former.

The mandate of promoting home ownership at all costs (literally) by these institutions had run amok which is one of the reasons why we are in this mess. While the GSEs served a noble purchase of providing standardization and liquidity to the mortgage market to promote home ownership, somewhere along the way, the link between value and risk was lost because systemic risks were not clearly understood. To be fair, they were simply one part of a giant problem, yet a key part because Fannie Mae set the tone for the mortgage industry and that message was grow at all costs and lend by exception.

Now that Fannie Mae is effectively a government agency, it is getting reacquainted with the religion of risk, and it’s become a quick student by adopting policies that are prudent, but very damaging to the collateral they are trying to protect. It is of great concern because the rules are being changed in the middle of the game, making weak markets worse by stranding thousands of would be buyers and owners. Many new development projects are stalled or have had only a handful of sales since the September tipping point.

Effective March 1, Fannie Mae:

The government-backed mortgage-finance company stopped guaranteeing mortgages in condo buildings where fewer than 70% of the units have been sold, up from 51%. In addition, the company won’t back loans for sales in buildings where 15% of current owners are delinquent on association fees or where more than 10% of units are owned by a single-entity.

Prudent, yet devastating to the existing inventory of newly developed condos across the country – a robotic like ruling that may likely stop most sales activity in new developments if buyers can’t qualify for mortgages. This will simply damage the entire collateral classification (new development condo) and push many existing loans underwater.

Of all the new changes (which are not unreasonable if the housing market wasn’t in crisis) the increase from 51% to 70% pre-sale requirement for a mortgage to qualify for purchase by Fannie Mae makes it nearly impossible for buyers to qualify for a mortgage in a new development unless it is nearly sold out. All the projects that came online late in the cycle could be damaged by this hard core – its a catch-22 really. How does a project claw its way from say 20% sold to 70% sold? All cash lenders and those that ignore Fannie Mae are few.

The policy will result in a higher rate of foreclosures for entire developments as well as individual homeowners who no longer qualify.

In other words, if you helped make the mess, you need to help clean it up, not make it worse. And of course, get a bonus.

Too Big to Fail Meets Too Failed to be Saved

Posted by Jonathan J. Miller -Thursday, March 12, 2009, 11:27 PM
1 Comment

It’s becoming apparent that several of the large institutions that are in the vortex of bailoutdom are teetering: namely AIG and Citi. They were deemed too big to fail, bit now we are wondering if they are too far beyond saving.

I am struggling with this concept and am rambling here, but now is the time to fix things for the long term benefit. I am sick of quick fixes.

The Too Big to Fail policy is the idea that in American banking regulation the largest and most powerful banks are “too big to (let) fail.” This means that it might encourage recklessness since the government would pick up the pieces in the event it was about to go out of business. The phrase has also been more broadly applied to refer to a government’s policy to bail out any corporation. It raises the issue of moral hazard in business operations.

The top 5 banks are showing significant signs of weakness.

Citibank, Bank of America, HSBC Bank USA, Wells Fargo Bank and J.P. Morgan Chase reported that their “current” net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31. Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.

The industry never thought macro enough to consider systemic risk – as in “What happens if it all goes wrong?” Seems pretty basic.

The Federal Reserve appears to be trying to reform its ways and perhaps even the concept of too big to fail. Fed Chairman Bernanke just spoke to the Council on Foreign Relations…

Until we stabilize the financial system, a sustainable economic recovery will remain out of reach. In particular, the continued viability of systemically important financial institutions is vital to this effort. In that regard, the Federal Reserve, other federal regulators, and the Treasury Department have stated that they will take any necessary and appropriate steps to ensure that our banking institutions have the capital and liquidity necessary to function well in even a severe economic downturn. Moreover, we have reiterated the U.S. government’s determination to ensure that systemically important financial institutions continue to be able to meet their commitments.

…while former Fed Chairman Greenspan has been attempting to re-write history.

David Leonhardt, in his piece “The Looting of America’s Coffers” said:

The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.

In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer said, would have operated in a completely different manner. The investors displayed a “total disregard for even the most basic principles of lending,” failing to verify standard information about their borrowers or, in some cases, even to ask for that information.

The investors “acted as if future losses were somebody else’s problem,” the economists wrote. “They were right.”

Last week, Sheila Bair of FDIC told 60 Minutes she would like to see Congress attempt to set boundaries for banks to remain as banks. In other words, they grow beyond a certain level, they become some other entity but can’t be bailed out if something goes wrong. Perhaps this implies a higher risk which is understood by investors, forcing the institution to decide whether it can afford to be bigger.

Let’s get our act together real quick or we also too big to fail?

Aside: Why make billions, when you can make millions? – Austin Powers

[100% US LTV] Why Housing Matters Within the Solution

Posted by Jonathan J. Miller -Wednesday, February 11, 2009, 11:46 AM
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In Q1 08 there was $22T in US residential real estate value and $15T in debt per the Fed (68% LTV). Based on CSI decline trends this year, its probably more like $18T in value now with a 83% LTV. If the prognosticators are accurate and we are halfway through the decline in housing values, it approach 100% LTV in the next two years.

Result: refi wiggle room, more vulnerability to resets (despite lower rates), higher probability of foreclosure and bankruptcy.

Translation: Bad.

There is a fascinating paper published by the San Francisco fed by John Krainer, a senior economist there that sheds more light on the linkage between mortgage lending and the stability of the banking system. Conventional (no pun intended) wisdom is the exclusive domain (no pun intended) of subprime and shoddy Alt-A and prime lending. Of course this is a significant component, but it is also about exposure to and dependence on mortgage lending in its relation to other loan products.

Krainer says

Over the past several decades, the commercial bank share of total real estate lending has slowly declined as other lenders have entered the market. At the same time, however, the percentage of total bank assets exposed to real estate has increased for banks of all sizes (see Figure 1). In the mid-1980s, for most banks, about 20% of total bank assets were exposed to real estate, and today the exposure is about 50% for small banks (under $500 million in year 2000-level dollars) and medium-sized banks ($500 million to $1 billion in 2000-level dollars) and just under 40% for large institutions. This basic trend is even more pronounced when considering real estate loans as a share of the total loan portfolio: banks now devote about three-quarters of their total loan portfolios to real estate lending.

The evidence suggests that spillovers of real estate shocks into bank performance are strongest for those types of loans where the collateral is some type of real estate. Spillover effects are strongest for residential loans and construction loans, followed by nonresidential loans. Importantly, all measured effects appear to be much stronger in the 1990s than in the 2000-2007 period. Given that we are currently in a period of declining house prices, it may be reasonable to assume that loan performance will behave more like the observable relationships from the 1990s.

The linkage between mortgage defaults and bank performance is widely understood. Small and mid sized banks were much more aggressive in residential lending since 1980. My guess is that the proliferation of mortgage backed securities in the early 1980s leveled the playing field allowing small banks to grow rapidly this way (remember Countrywide?).

With most of the large banks applying for TARP money, it makes me worry how many small banks didn’t have the legal know how to react as quickly to get on the receiving line of the bailout or more importantly, were a lower priority by the former administration’s Treasury department.

I haven’t digested the whole thing yet, but here is a speech by Fed Governor Elizabeth A. Duke at the Global Association of Risk Professionals’ Risk Management Convention in New York today: Stabilizing the Housing Market: Next Steps.

UPDATE: In response to the 24-7 whining and gloom/doom by many economists (and an appraiser I know), consumers should say: “Well, then what good are you if you can’t tell me what I should do”?

[Housing RX] It’s The Principal Of It

Posted by Jonathan J. Miller -Wednesday, February 4, 2009, 12:49 AM
2 Comments

A lot can be said for getting to the bottom of things by not propping them up. It’s looking more and more like toxic mortgages have to be dealt with before things begin to improve on the lending so that liquidity will return:

According to new research, loan modifications without write-downs will not lead to the end to the credit crisis. There has been a tremendous amount of negative press about modifications because in many cases, the payments are not much less, with the additional fees and principal moved to the end of the term.

In a fascinating research paper by economists Patrick Bajari, Sean Chu and Minjung Park called Quantifying the triggers of subprime mortgage defaults that explores what drives borrowers to default on their mortgage.

First, default amounts to the exercise of a put option that limits the downside risk when the value of a house falls below the value of the mortgage. Thus, one strand of research has focused on how net equity or home prices affect default rates. Other studies have examined the importance of financial frictions; households may be liquidity-constrained and temporarily unable to pay, especially if they have low credit quality.

The two reasons are equal in their impact on default rates. Here’s their influence on default rates:

Based on the importance of illiquidity as a driver of default, the observed deterioration in borrower pool quality is consistent with the notion that lenders loosened their underwriting standards over time, perhaps due to flaws in the securitisation process. Because lenders do not hold mortgages that they have securitised, they do not bear the consequences of risky mortgages at the point in time when they go bad, even as they continue to generate income by originating such loans. This agency problem, coupled with the general underestimation of default risks by financial markets at the height of housing boom, gave primary lenders an incentive to lower their lending standards. Thus, a key policy implication is that future waves of default can be made less likely by measures that reduce originator moral hazard.

Write downs in principal, ie mark to market, will need to enter the recovery equation soon.

Because we find empirical importance for both illiquidity and net equity as drivers of default, this suggests that effectively mitigating foreclosures would require either some combination of policies targeting each cause, or a single instrument that targets both. For example, loan modifications that merely increase payment affordability by extending loan lengths would not be very effective as a standalone measure, as they would leave borrowers’ equity positions unchanged. On the other hand, write-downs on loan principal amounts would address both causes simultaneously, with the reduction in loan size serving both to increase the borrower’s net equity as well as reduce monthly payments.

[Mark-up] 2009 U.S. Real Estate Investment Outlook

Posted by Jonathan J. Miller -Thursday, January 29, 2009, 12:24 AM
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A matrix reader passed along a mark-up of 2-2008 report by RREEF Research – RREEF Alternative Investments is the global alternative investment management business of Deutsche Bank’s Asset Management division.

The mark-ups are quite compelling in contrast to the original document.

Overview Mark-Up Summary: OUR BASE OUTLOOK STILL HOLDS. TIMING IS NOW THE
QUESTION, A DELAYED OR FEEBLE RECOVERY WILL PUT OFF RECOVERY FOR DEMAND

Other points of interest:

CONDO “REVERSIONS” TO APARTMENTS ARE STILL A SUPPLY CONCERN.

and

THESE METROS GENERALLY OUTPERFORMED IN OCCUPANCY DETERIORATION BUT MOST ARE HIT WITH AS SHARP OR SHARPER RENT DECLINES COMPARED TO OTHERS.

and of course:

THINGS THAT DID SEND THE ECONOMY INTO RECESSION:
• HIGH OIL PRICES.
• INFLATION WORRIES DURING FIRST HALF.
• MAJOR BANK FAILURES.
• PROTRACTED CREDIT CRUNCH.

Here’s the full “mark-up” document on their site. If the link breaks, try this one.