[Matrix Zeppelin] a hefty profit, take your family out to dinner, Prolonging, rather deal with higher interest rates, greed and dishonesty, cliches, They are the worst, “fix” value, staight out liar, muck up the works

Posted by Jonathan J. Miller -Monday, March 3, 2008, 12:01 AM
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Well, the Matrix Zeppelin needed repairs, but the turmoil in the credit markets made it difficult to get a loan to make the repairs. But with the stimulus plan rebate check on its way, I decided to put the repairs on my credit card. Here’s a selection of recent comments on Matrix, whose readers cut to the chase:

• Eliminate AMC’s and their high pressure tactics. They muck up the works mostly, get the instructions wrong, order 1004’s for condo units, forget to give you a unit number, or sales contract, contact phone numbers, etc etc.

• Who has been a lender for 15 years is just a straight out liar. Terry comments that he or she has not yet to find an appraiser who will fix value. That means that he or she has tried, therefore the problem does exist. I believe Terry is just mad because now he or she will not be able to control a appraiser or appraisal value on a property. I have had on numerous occasions mortgage people call to see if I would push value. I never did and never will.

• I’ve been a table funding correspondent lender for 15 years and I’ve yet to find an appraiser who will “fix” value for me. Your premise that mortgage brokers are pushing appraisers to set value, in my opinion, means the appraiser is the one to blame, not the mortgage broker. Certainly, there are “crooks” in every aspect of every business. Maybe you should get rid of them and not penalize those that have never had an issue following the lending guidelines.

• Unless there is a minimum appraisal fee then I see more problems coming from this then good. How is the government going to order an appraisal? What would be different from whats going on with AMC’s now? They are the worst of the worst in terms of pressure and poor training. Somebody better clarify this quick because there is no such thing as a disinterested business

• When we start to see lots of job listings for asset managers and work-out professionals on monster.com et al we’ll know this thing is getting understood and we’re there. Until then we hang in

• There’s been a paradigm shift in cliches…

• the banks lent 100%+ on the appraised value of the home without looking at ANY supporting documentation. The model is flawed because it does not account for greed and dishonesty.

• As a buyer, I’d rather deal with higher interest rates and less innovative financial products along with a lower house price. My property taxes will be lower, and I can always refinance if interest rates drop in the future.

• What’s the point if they’re just going to default a few years later due to ARM resets? Note that I’m not even talking about the abuse from liar loans. If the conforming limits varied by region years ago, I would not have a problem with that. However, introducing this right now (and temporarily at that) will have the effect of prolonging the housing crisis more than necessary.

• Jon Stewart summed up the “too little too late” observation on the Daily Show last night with the following (paraphrased) quip: “Look, we know your house is in foreclosure … and you lost your job … and you don’t have health coverage. But listen, here’s $400. Take your family out to dinner at a nice restaurant and try to forget we destroyed your economy.”

• This video makes it seem like all the people who got mortgages needed to refinance or had rate adjustments. While in fact most people never needed to refinance nor did they have rate adjustments. Additionally, of those people that needed to get out of their sub-prime mortgages, a large portion were able to sell their property, which appreciated enough to yield them a hefty profit.
  

[Matrix Zeppelin] Negative carry, when they crashed, risque calender, 212, buyers quibble, explain to the bank, WAY more, Repeat sales, slippage, derivatives

Posted by Jonathan J. Miller -Friday, April 6, 2007, 8:57 AM
2 Comments

Well, the Matrix Zeppelin has been in storage lately, its owners trying to figure out whether to rent or buy a garage for it. In the meantime, Matrix readers have been busy trying to touch up their photos of the market, trying to decide whether it looks better or worse than before:

• We’re all familiar with the rapid escalation of home prices over the last 10 years. For most Americans, their homes have been the best and in many cases the only investment that they have made in their entire lives. Some have gone so far as to invest in several homes and have endured ‘negative carry’ on the cash flow in anticipation of leveraged capital gains a few years down the road. But where does it stop? Can housing continue to increase at twice the Consumer Price Index for the next 10 years?

• According to Steven Roach, the dot com stocks only made up about 6% of the markets when they crashed, but sub-primes made up about 10% of last years real estate market.

• As a Realtor and a professional photo retoucher/photographer, I would NEVER alter a photograph in such a way that it could be perceived as misrepresentation. I am very careful about such things. In the past I have adjusted the color, contrast, brightness etc. (say if I took the image on a cloudy day). I have removed trash cans from front yards, laundry and toys from bedroom floors, even a risque calender or two from office walls…but never ever have I given the impression that the house was in better repair, the yard was more manicured or the neighborhood was more desireable. We have to be very careful about doing anything that could come back and get us later.

• I live and work in 10021 and would hate to see any changes. It’s not status (I swear)it’s just that as I age (mature?) I find myself less and less tolerant of these kinds of upheaval. My home and office phones are 212 (I rule!) but my cell has gone from a 646 to the foreign sounding 347. An agent I work with, an otherwise fine gentleman, has a 212 cell number. he is hated office wide for this.

• As a broker when dealing with condos i use the square footage given in the offering plan and then say approximately. Reasoning being the offering plan to me is the official number and as you said everyone else who comes in to measure will get a different number. When buyers quibble my response is that all square footage is not the same or more clearly 1000 sf in one property will seem larger than 1000 sf in another. It comes down to usable space, how the space presents etc and then, what are you buying square footage or a home?

• Whenever I appraise a condo, I always measure. Most times the official measurement is very close. I presume this is because the architect has to certify the plans…Nonetheless, I generally use the official measurement when doing the sales comparison approach. Why? Because that is what the typical buyer will consider. But I always include both measurements and explain to the bank the reason for the discrepancy (e.g., they included exterior walls, different method).

• You fail to realize that “homeownership” can only continue if employment does. What it sounds like you’re really saying is “I have a job and a house so I don’t care about other people.” Having higher employment is WAY more important for this country than high home “ownership.” People can always rent a place to live, but it’s more important that they be able to eat and clothe themselves than buy a house.

• Repeat sales method takes each sale and compares the price paid versus its prior sale and then you combine the change in aggregate over a specific period – shiller apparently adjusts or factors for changes in the house – ie an extension. I’m not sure how this is done and it won’t consider an extensive renovation, for example nor does this index consider foreclosures or new development (its the first time sold so there is no repeat).

• Case-Shiller picks up foreclosure sales between the bank and the market, not the mortgagee and the lender. From the methodology paper: “… Although identified foreclosure transfers are excluded during the pairing process, subsequent sales by mortgage lenders of foreclosed properties are candidates to be included in repeat sale pairs.” New developments are not included because the methodology requires at least two recorded transactions prior to admmission into the index. Since Case-Shiller and OFHEO are repeat sales based indexes, there is “slippage” in the sense that untraded iventory is not absorbed in the indexes. (As correctly noted above.) If there was an appraisal method, then a value could be guess-timated. However, over the long run, all these properties will eventually transact and will then be accounted for in the indexes.

• There is a Case-Shiller index that tracks national housing prices. The index symbol is SPCSUSA. It updates quarterly instead of monthly. It is being traded as a forward over-the-counter (OTC), not as a listed futures contract. The forward market for expiration February 2010 is -12% bid, -4.25% offered. The derivatives market views nationwide housing prices as expressed by this Case-Shiller index as substantially lower looking out three years.

[Matrix Zeppelin] Stuffing omelettes, fire sale, skewed, inconsistencies are consistent, in the black, rolling junker, your britches

Posted by Jonathan J. Miller -Monday, November 27, 2006, 12:02 AM
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Inventory levels stirred the most discussion in the shortened holiday week and a lot more answers than the original post was attempting to provide. And lets not forget Stuffing Omelettes, represented to be insanely good and now served on the Matrix Zeppelin:

• In a stabilizing/stagnant market, you don’t want to flood the market with units, and so you may choose a specific unit type to offer and figure that the remainders will either be sold alongside them, or held back for rentals. Much of the pricing strategy depends on when the developer sees their first returns. With a 90% LTC, it may take until the penthouse floors are sold for the developer to actually see their ‘profit’…In general, you save the PH for last so that you can leverage the successful sell-out of the lower floors to command a high premium for the PH. If you’ve already made your returns, then you might be wiling to fire sale the remainders.

• If the number of condo units being built is spiking up in recent years, leading to new condos being a larger percentage of overall housing stock, then even if the percentage of new condos being warehoused is a constant, wouldn’t those held-back inventory units be increasing as a percentage of overall units available? Meaning data is more skewed now than a few years ago?

• I have a similar problem in Charleston. My inventory numbers on condo/townhomes are off because the marketing agents will not list all of the active condos when they are available. For example there is a 315 unit condo conversion and the realtor only has 5 units as active in the MLS right now. This really skews the inventory numbers in the market and it is impossilbe for me to track all these scenarios.

• Clearly the tic upward in new developments under construction would skew the unreleased inventory numbers upward a little as well. Does it matter? Is it inventory if it isn’t built yet? When I sell in new construction it may take several months to a year to close the deal. It seems that the equally significant numbers are related to sales volume. The sold and closed deals from new developments today, reflect a significant delay in buyer activity from as much as a year ago. Likewise, I’ve a number of new development deals in contract for next year that represents buyer activity from the second half of 2006. It means that there is hidden buyer activity too. Since it’s ultimately a supply and demand question, to be relevant, doesn’t the inventory question need to be considered in relationship to absorption? How is it possible to really understand it at all with so much elasticity in the timing of that relationship? Suffice it to say Johnathan, that the post raised more questions for me than it answered; but I’d agree with you that, “…this technique has been done for as long as I can remember, inventory numbers should still show reliable trends. In other words, the count would be considered a constant in the equation.” At least I can take comfort in the fact that the inconsistencies are consistent.

• Once a developer is in the black, whatever the mix, prices will climb – even if simply to tell customers to submit offers, that invariable tend to be high offers (or higher than the previous asking price) – you can achieve this in any market as long as your initial marketing mix creates a feeling of something being exclusive – once you have that and have sold a unit or two – even at low numbers – you simply make your money back on the remaining property.

• I always get a chuckle when I see signs like that – or the ones that say “Make $3000/mo P/T – $8000/mo F/T”. You’d think if they were so successful, they could afford to have professionally-made signs. The best one, however, is the sign on the rolling junker that says “We buy houses”. Yeah, right… you can’t afford four tires that match, but you can buy a house for cash…

• Speaking of stuffing. The next morning use the stuffing to make Stuffing Omelettes. It is insanely good.

• We see signs, just like the one shown above, all over the Ocala area… and yes, we are also seeing the “We Buy Ugly Houses” ads as well. Just hold on to your britches, the next year should bring us more comedy in Real Estate!

[Matrix Zeppelin Series] starry-eyed, rents have gone up, notice of default, stat worthless, being greedy, See you next Tuesday, DEADCAT BOUNCE, one $200 meal, sanctions

Posted by Jonathan J. Miller -Monday, October 16, 2006, 12:01 AM
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This week a lot of time was spent discussing rising rents, the bounceback, forclosures and discussion of new brokerage models, that ignited some great contributions. I was pounced on for being a little cavalier about a thorough research paper. (But there is no pouncing allowed in a deadcat bounce.) Read it on the Matrix Zeppelin:

• I think that I make a reasonably good case that brokers offering new rate structures are being illegally discriminated against in many ways, and as the Wall Street Journal editorial page complained in 2005, sanctions against brokers have not been forthcoming.

• Commissions based on the % system of compensation will always be criticized as unfair for the same reason a waiter serving one $200 meal gets a $40 tip while one serving five $20 meals gets only $20.

• Also the bounceback you talk about, could also be a DEADCAT BOUNCE.

• You say, “See you in six months” when a buyer says they don’t want to buy now. I say, “See you next Tuesday.”

• What all of you have neglected to realize is that this process virtually assures that the borrower ends up with the best offer. If you are worried about losing the referal business that you have worked so hard to cultivate, maybe you need to make sure that you have the best offer available on the table for your customers (instead of being greedy). You should also be sure that it is your customer’s best interests that you are concerned with (fiduciary responsibility??), and not your own. If you don’t do these thing, I am going to be there to take your business and your referal business will forever and after be mine.

• If half say prices are going up is that a good thing? I don’t think you can say. If they already think houses are overpriced, the belief they will rise further would not lead me to believe they are happy about the prospect of overpaying some more. And how many of those who answered the poll Yes going up, were in the market to buy? If most of these YES votes were homeowners who just bought I think they would rationalize they made a good investment, thereby rendering the stat worthless in my opinion. Also, the other half sees prices as going down or neutral (you don’t state in your post for comparison). I don’t see that as positive news since if you believe housing prices will drop you will WAIT until they do before you buy, wouldn’t you? I guess, in the final analysis, it’s just a half a glass of water.

• The important metric is how many homes out of the total inventory are currently in foreclosure. Why? Because homes in any stage of the process are under pressure to be sold quickly. In a market with 7+months of inventory, that means even Notice of Default homes (not yet foreclosed) will have to be discounted to sell before the Notice of Foreclosure goes out. By the way, when I said the homes have, “entered the foreclosure process” in my previous post, I meant that they have received a notice of default or are at auction/REO.

• Lets say rents have gone up 30% this year. Explain to us how landlords would be able to continue to raise rents 30% per year for the next 3 years, if people’s income did not increase at that rate as well? I think Skep-tic’s point is, that people could use many different types of loan products to buy apts in Manhattan, i.e. interest only neg. amortizing, to name a few, and thus leverage their income to pay more and more to buy an apt. But you can’t do this when you rent an apt.

• This sounds an awful lot like surveys of individual investors in late 2000, who still had starry-eyed expectations of 10% annual gains in their equity portfolios, in spite of all evidence to the contrary. A population with no basic understanding of economics and a vested interest in the status quo is going to take longer than would seem rational to come around to reality.

[Matrix Zeppelin Series] utter desperation, Madden Curse, collapse city, anonomous wolves, sales are way off, listen to the CEO’s, parallel universe, blink first, entry barrier, fierce competition, stretch to buy, WAY south

Posted by Jonathan J. Miller -Friday, October 6, 2006, 2:36 PM
1 Comment

A lot of grumbing about the economy and real estate brokers this week (that isn’t hot air) as well as some carry over on the herd mentality discussion last week. Here’s a few notable comments from the Matrix Zeppelin:

• Concerning the issue about the media and the herd mentality – There is no question in my mind that the media helps create a mindset that pushes the trend to the extreme. I am a regular reader of Money.com. Last year, they ran a regular series of articles called “Mogul in the Making” that show cased how some average person (like a fireman or a housewife) was making big bucks in real estate. The articles mostly made you feel like you were missing out if you were not investing in real estate. During that time, never once did I see an article about someone’s home not selling. Now, they run an article about once a week called “Help – my home won’t sell” and showcase someone who had high hopes of a quick sell and it’s just not happening. The articles are written to show utter desperation on the part of the seller. In the “hot” market, I know of homes that sat on the market for months, and I now know of homes that have sold in a matter of days (I am in Atlanta). Once a trend starts, the media shows no balance at all, which in turn helps drive the “herd” to the extreme.

• The funny thing about Herd Mentality (and something that Wall Street veterans know) is that going in other direction can be much more profitable. I look at Money Magazine cover stories and I think of the Sports Illustrated Curse. If you’re younger than 25, you may also know this as the Madden Curse. Anyway, I am envious of homebuyers in the market right now. Not only are mortgage rates the lowest that they’ve been in 6-8 months, but sellers are fearful of not being able to sell. Low rates and low prices — an excellent buying situation.

• I would hate to be in a fox hole with Ms. Corcoran. Her suggestions have panic written all over them. If I were interested in her clients home I would know beyond a shadow that they were in “collapse city” mode. Maybe some creativity and good old fashion overtime would help. Problem is these sellers have signed up for a closing as quick as possible evidently. Buyers lick your chops. It’s time to unleash the capital now that everyone is locking down.

• [re Curved: Three Cents Worth] Holy Crap did you get thrown to the anonomous wolves! I love that when one person voices their opinion openly, it is criticized by those unwilling to stand by their opinion with their name. At least I like the graph… Good job.

• I don’t see why anyone would be envious of buyers when affordability is at an all time low. The fact that sales are way off in an environment of low interest rates and solid employment reveals just how far prices are from sustainable.

• I think the key point that needs to be highlighted is that the July numbers were revised significantly lower than previous. If you go with the original July numbers Aug would be lower. My guess is they will futher revise the Aug numbers lower once all the new construction cancellation factors in. One just needs to listen to the CEO’s of Lenar, Toll, etc on what the market is doing.

• I’ve thought since this spring the short term rates would be falling simply as a corrective response to Greenspan paranoia. The inflation he was constantly fighting simply didn’t exist, at least to the extent he wished us to believe. The economy has been absorbing all the ‘extra’ money supply. What I’m really eager to see is how the Fed responds to $45 oil, becuase it appears it’s in our near future. Will they call the positive economic response inflationary? If so, we’re in trouble again. Sometimes I think the Feds live in a parallel universe.

• So whats it going to be. Are owners going to blink first or buyers. Will it be a soft landing,or will prices continue to decline gradually over a long period of time? I have a question for every owner trying to sell their apt in manhattan. Can they afford to buy their apt today for the price they are asking. Do they have the cash available for the down payment, do they have have the income necessary to service the mortgage debt. I bet the answer to this question by most sellers would be no. So what makes them believe that someone else out there can?

• It is unfortunately true that the entry barrier for real estate brokers is very low, especially in New York. I have always found it odd that one of the toughest real estate markets in the world has such low qualification requirements for its professionals. Good news is, Department of State has decided to raise the bar. If there is no change in plans, as of January 2007, the number of hours required for licensing as well as continuing ed will increase. Although it is not quite sufficient to bring the industry standards to the necessary level, it is a start.

• Thanks for posting this. I am seeing articles on line that indicate that new agents had it easy and will be the first to leave when things get tough. This business has never been easy. New agents had fierce competition because there are so many of us. Some of the experienced agents are the ones the coasted through the boom years and they may have trouble. They were so busy they did not take the time to learn new skills. They will wake up and realize that if they can’t use a computer they may be in for a rough ride.

• I’m surprised the number of people in NYC spending 30% of their income is so low. I certainly spent more than that when I lived on Avenue A. On a side note, I will suggest to the NYT that Boulder and College Station, where nearly 50% of renters spend 50% of their income are both home to large public universities, so the incomes may be skewed. As one who now manages a portfolio of workforce housing communities across the midwest and south, we’re noticing a nice uptick in occupancy and a gentle increase in rents. We don’t operate in markets like DC, where the ‘conversion’ fad removed a large portion of the managed rental stock (as opposed to investors who will rent individually), so rents are rising because of demand, not a lack of supply. That said, I don’t agree with Mr. Frey that people necessarily stretch to rent as much as they stretch to buy. I think they rent where they feel safe, find attractive amenities, and can make their rent payments without unreasonably stretching.

• If inflation continues to be a concern (as it is now, accorsing to fed statements), the Fed cannot cut rates. If it does, long rates will rocket up, making refis impossible. If inflation plummets and allows the Fed to cut rates, that means the economy is heading WAY south next year. I see no good outcome here.

[Matrix Zeppelin Series] Sticky, Herd Mentality, Media Not Distorting, Acceptance of Risk, Smell Like Cabbage, Fear of Music, Price is Key and 75 Laminated Signs

Posted by Jonathan J. Miller -Friday, September 29, 2006, 7:38 AM
5 Comments

Despite Talk Like A Pirate Day and the Carnival of Real Estate Matrix readers actually thought about other things and said their piece.

Throwing caution to carny barkers walking the plank, here’s a few notable comments from the Matrix Zeppelin:

• I find it interesting that people expect housing prices to “crash,” yet they are unwilling to see the value of their own home as dropping. Real estate prices are sticky-downward, because we price our homes based on our expectations and desires, not newspaper reports.

• media coverage, if its not accurate, can help exagerate the highs and the lows of a market. I am not blaming the media at all, its just that I think there is a tremendous herd mentality out there right now.

• the “herd” is finally waking up to the reality that housing prices must revert to the mean…the media is not distorting the issue; they are merely taking a hard look (for the first time in many years) at the fundamentals of real estate. and the fundamentals are overwhelmingly negative.

• Sort of along the lines of what you are saying, I know my own perception has changed, over the past several years. Three years ago, when I bought my first condo, I wanted as much home as possible, so I got an adjustable rate 1st loan and interest only 2nd loan. This time around, in May, I was steadfast against getting an ARM, for either. The rates were just a bit higher for the 1st, and a lot higher for the second, but I didn’t want to take any chances. Bottom line? My acceptance of risk had been reduced, because of the uncertain housing market. Others, especially those who can’t afford to take out a fixed-rate mortgage loan at 8% instead of 5% (our 2nd loan rate) will have no choice but wait it out.

• I find the best blogs at “carnivals” also tend to find carnies. Small hands. Smell like cabbage.

• I am in Hoboken and it’s a sea of “For Sale” signs, whether on the street or attached to buildings. But I grew up in a town that banned them. I guess it is supposed to provide owners with a sense of security, but frankly, if you really want to sell, I think it’s pretty decent advertising.

• Here’s another one from Coldwell Banker that claims it will help me “Find myself a city to live in.” (If you’ve also got Fear of Music and ‘77 in your collection, you’re all set as far as I’m concerned.)

• I have come to a similar conclusion concerning refinancings, but do you think that it will really have an effect on homebuyer mentality? I think that even if rates drop a little, sales will still be down and inventory up, because at this point price is key, and until that comes down, nothing will move. After all, interest rates have been low and falling all summer and it hasn’t helped at all. But that was just my own thought.

• I know this comment is a little late, but did you hear what Barbara Corcoran had to say today on Good Morning America? She is trying to demonstrate how to sell your home in 7 days and amongst some good ideas she stated: 1) Blanket your area with “For Sale” signs. Corcoran made 75 laminated signs at Kinko’s for a total cost of $324. Make your signs bright and clear. Bright yellow is the most memorable color. Use clear, big, black lettering so people can read it easily. 2) Corcoran also made up car magnets and a giant billboard in front of the house. 3) The Freunds’ [the sellers] friend owns a ski shop on the major interstate in town, so Corcoran hung a nine-foot banner across the front of the shop. Seventy-five signs, one billboard and a nine-foot banner. Yikes!!! No doubt that Town Board will have a very lively meeting the next time they get together.

[Matrix Zeppelin Series] Coastal, Gentrifying, Negative Light, Overload, Raw Numbers, Get Ugly, Lereah Is MIA, Bonuses, Slowdown Coming, Going Into Foreclosure

Posted by Jonathan J. Miller -Friday, September 15, 2006, 6:46 AM
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This week, there was no hot air in the Zeppelin commentary. In fact it was so heavy, I don’t think it got off the ground. Here’s a sample:

• It’s interesting reading everyone talk about the inpact of interest rates on the slowing real estate market. “Rates when up .24356, that’s why real estate is slowing” etc. That is nothing! I live in Florida. I paid $3500 for my home owners policy last year. I thought that was too high. I just got my renewal notice. My new premium is $12,500! That’s an increase of $700 per month! Florida and the coastal areas of the US are in a free fall in property values as it is. This new wave of insurance hikes will be a disaster for coastal property values!

• Are you allowed to say “in a gentrifying area”?

• I have come to belive all news is presented in the most negative light possible, especially news about the economy. I have also come to believe that most people who post comments to blogs or news stories want the sky to be falling (I don’t know why – but it appears to be the case). I expect that you will be bashed for trying to “keep it in perspective”. [as I suspected, Matrix readers didn't do that - Jonathan]

• We can strip away all the information overload and focus in to what real estate pricing is all about which is simply supply and demand.

• You definitely pinpointed the limited usefulness of the RealtyTrac report in that the comparison should be to the national housing stock that has mortgages. That’s exactly what the Mortgage Bankers Association did in a survey out today, which puts the foreclosure rate for the second quarter at .99 percent — up 1 basis point from last quarter, but down 1 basis point from the same quarter last year. If you have a lot more people taking out loans, as they did in the boom years, the (raw) number of foreclosures is naturally going to go up, even if people are just continuing to default at the same old rate. The real question is what’s the number of homes in foreclosure as a percentage of all loans. The MBA survey did show a pretty good bump in the number of delinquencies on subprime and FHA loans, however (and even prime ARMs), but chief economist Doug Duncan said he doesn’t expect “order of magnitude” increase in delinquencies next year. Companies like RealtyTrac are in the business of selling info about foreclosed properties to investors, and maybe the raw numbers mean something to that crowd — like more opportunities to cash in on others’ misfortunes. Which doesn’t mean their numbers aren’t true. They just, as you say, lack perspective.

• Here in Southern California, foreclosures (Notice of Defaults, actually) are sky-rocketing. In the first year of this housing market down cycle, the monthly number of NODs is already nearing the worst monthly levels of the 1990’s housing market down cycle. Yes, this is perspective. This is going to get very ugly before the sun starts to rise again.

• Now that you mention it, Lereah has been MIA for the NAR — hadn’t noticed that. Stevens tenure is about to end, so we soon won’t have him to kick around any more. But let’s give it one more shot. The Washington Post carried a piece last Saturday about (essentially) NAR President Stevens getting caught in the market … um … correction. “his old house in Great Falls has now been on the market for a year at the price of $1.45 million.”What I should have done,” confessed the senior vice president of NRT Inc., parent of Coldwell Banker Residential Brokerage, “was listened to my agent and cut the price by $50,000 to $100,000 early on, and the property would have sold last October.” Or, even better, he said, “I should have listed it a month earlier,” when the market was only just beginning to lose air.” And on, and on he goes. I don’t know what average days on the market is in the DC area, but I bet it is less than 365. And Stevens hasn’t sold yet…

• I was under the impression that prior to the impending bonuses of 2006, 2005 was also a record year. However, it didn’t seem to do all that much for housing – maybe in the luxury/ultra luxury area, but not overall. We still had a lousy spring. So I can’t see why that would change this year, with inventory so much higher. Besides, don’t all those rich guys own by now?

• New York’s economy is strong, and people are pouring in. In the short run, therefore, any price decrease would be the result of prices being too high relative to income to being with, and nothing else. I think that may happen. Next year, however, it may also be that weakness in the housing market elsewhere causes weakness in the economy elsewhere and weakness in the stock market, working its way back to NYC. Bonuses will be at record levels this year, but Crains reported on Monday Wall Street’s three-year bull-run is losing steam. “After a terrific first half, earnings are expected to fall 40% in the second half…The slowdown is hitting virtually every trade plied on Wall Street. Stock and bond underwriting volume plunged nearly 50% in the summer quarter compared with a year earlier. The hugely lucrative businesses of advising on corporate mergers and taking companies public are also slumping.” Perhaps, with a slowdown coming, those high flying finanical geniuses won’t blow their bonuses this time around. Naaaah.

• But you DON’T have perspective until you can answer the question, “What is the impact of NODs (or foreclosures) on the market?” Are they affecting inventory? By how much? What other pressures are there on inventory? The RealtyTrac survey reports 12,506 California homes entered into foreclosure in August — up 25 percent from July and 160 percent from the year before. That sounds pretty serious, right? Well, maybe not if foreclosures were at historic lows. Maybe not if some 500,000 homes change hands in the state every year. Which is not to say that the market’s not soft, especially in particular areas. Inventory in the state is up — CAR puts it at 7.5 months in July, versus 2.9 months same time last year. But what is causing inventory to rise? Is it because more homes are going into foreclosure, or because houses are just sitting on the market because they are overpriced? The bottom line is that the raw number of foreclosures, by itself, doesn’t tell you that much about supply and demand.

[Matrix Zeppelin Series: Readers Write] Perception, Substitution Principles, Apples To Apples, Timing, Sidelines, Dis-intermediate Or Impractical

Posted by Jonathan J. Miller -Friday, September 8, 2006, 5:35 AM
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We are now in post-Labor School Is In Session Mode and Matrix readers are showing it. This week we had many well thought out points of view on a whole range if issues. There were a few readers that stayed after school to finish them:

• Falling prices do not spur sales—stabilized and rising prices do. Most people did not buy stock when the market was falling? If they did it was only because their “perception” was that the fall was temporary. Slowing of housing sales tells me that the current “perception” is that prices will continue to fall.

• There is a definite distortion in Shiller’s graphic, but I think the error is in the gov’t inflation numbers. Ever since Greenspan instituted the “substitution principle” in the inflation gauge we have had a false reading of true inflation. I think inflation since 2001 has been so under-reported, that by using the official numbers, we are seeing this skew in Shiller’s graphic. Looking at real world examples where I live (central Florida), housing is up 110% since 2001, milk has gone from $2.20 to $3.40/gallon, and we all know what gas prices have done in the last 5 years. Even Disneyworld tickets have gone from $40 to $67. About the only places I have not seen major price increases would be automobiles and consumer electronics/computers, but those are from production efficiencies. I imagine most of the HELOC growth has been because people are needing the extra income to keep the same lifestyle they had in the ’90s because incomes have been flat while inflation has been much higher than reported.

• If you want to know what the long term average annual price change was over the last few years as a whole then the OFHEO data is good. If you want to know what the average price change was during the most recent 12 months only you will not find that in the OFHEO data. This is becuase OFHEO uses same house data for determining their index – using the recent transaction compared to its prior transaction years ago. Apples to apples but measuring long term averages – not recent movement. A home bought five years ago and sold recently will show a positive average annual gain – even though it has declined during the latest period. The OFHEO HPI is essentially a rolling average of many years of price movement.

• Market timing is inextricably linked to the efficient market hypothesis. The EMH states, quite simply, that it is impossible to outperform the market. Why? Because the market is all-knowing, an asset is always perfectly priced based on all known information. All market participants share the same information and no single player has any advantage. Market timing is a perfectly valid concept in an imperfect market, especially in those markets where information isn’t equally shared among all players (an information asymmetry exists). A single participant who receives advanced notice of information will most certainly have an advantage over the other market participants. Information assymetry in the real estate market is just one of the reasons that it is an imperfect market. Keep in mind that real estate is a radically different asset than stock. While the stock market is far from being perfectly efficient, it is most certainly more efficient than the real estate market. Don’t forget that insider trading is a form of market timing. Does it work? Yes, albeit not legal. While I don’t believe it possible to “time the market” in a traditional sense, I do believe that the price of an asset will revert to it’s fundamental-driven mean when both overpriced and underpriced.

• While I agree that many are on the sidelines, I disagree as to why. I don’t feel people are not purchasing because they fear prices MAY fall, people are not purchasing because prices have NOT fallen. I am one of those buyers on the “sideline” and I’m not trying to time for the bottom. But I am looking for price reductions as I feel prices are overly inflated. (That being said I do plan to stay in any home I purchase for a minimum of 10 years.) So I feel that this doesn’t mean I’m trying to time the market. I’m just waiting for the inevitable and I think others are as well.

• I sell real estate now, but I was in the business of design and Web development for years. There is a old saying and a glib truth in selling and buying design services: “you can have it good, cheap and fast; but you can only get any two of those at a time.” I think that applies across many industries including real estate services. There is certainly evidence that technology can change things. The ability for it to dis-intermediate an industry, as the expedia/zillow guys did to travel agencies, is possible, but also quite rare. I’d ask you if the customer has actually benefited from it? Are air fares significantly cheaper because of it? I haven’t noticed; and it now costs my time to find the best fare and route. Discount on-line stock brokers did not put the full service ones out of business. The smart ones that offer real knowledge and guidance are still around. Amazon did not kill Wallmart, Ebay has not replaced Christies, and Yahoo did not see Google coming. There is room in the market place for multiple business models. The perception of value is what’s important. The big lie in all of this is that people are led to believe that they are getting the same services for less. What’s missing from the Redfin service proposition is any claim that they will work to get a seller the highest price possible. That’s what brokers actually do. Their model is based around doing it cheaper not better; and you generally get what you pay for. The caricature of the overpaid, lazy real estate broker is spin that serves Redfin and others who would like us to believe it. Like the title of your post implies Jonathan, as an industry, full service practitioners and the NAR could probably do a better job at communicating.

• I might be able to market-time the cost of housing, but I can’t market-time things such as losing my job, getting a new job, having a baby, terrorist attacks, parents dying, getting divorced, having a mental breakdown, or inheriting wealth. It may not be impossible to market-time housing prices, but simply impractical.

[Matrix Zeppelin Series: Readers Write] House & Home, Hurricanes, Naivete Of Buyers And Junk Bond Analogies

Posted by Jonathan J. Miller -Friday, September 1, 2006, 6:10 AM
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Real estate commentary seemed to dwell on language this week: what they say and what they read into what others say. Matrix readers attempt to clarify the hurricane of terminology and still not get wet.

Trying to bridge the buyer-seller gap, here’s a few notable comments from the Matrix Zeppelin:

• I use the term house when talking to a seller, and the term home when talking to a buyer…

• I agree that there is a difference between “house” and “home” in terms of the underlying meaning they imply. I think “house” (or “apartment” in NYC) refers more to the property, while “home” is a warmer and much more emotional term to describe the place you live. The difference is most obvious when you compare a family looking to buy primary residence with an investor looking for property to flip or rent out. As a real estate broker, I would use the word “home” for the first, and “house” (or “apartment”) for the latter (not due to marketing concerns, but because I believe purchasing primary residence is the most personal and emotional transaction of one’s lifetime, and should be addressed appropriately).

• Aren’t there some stats that do only track single-family residences, i.e. “houses”, which if you’re getting into median or average prices, makes a BIG difference in NYC, where only the highest-end real estate falls into that category, as most “homes” are much smaller, cheaper apartments?

• I use the term house when talking to a seller, and the term home when talking to a buyer…

• The only thing that could turn the media coverage right now would be if hurricane JonBennet were to devastate Miami.

• The spike in media coverage reflects an overall anxed about the economy – and housing is an easy way to contextualize things. Housing experienced an amazing growth that nobody can really explain, and is expected to experience a significant reduction that nobody can really size. The economy is in a similar state. All indicators say that we’ve got harder times coming, but nobody really knows how much harder and for how long. In many markets, there’s currently such a wide gap between buyers and seller that there really is NO housing market to speak of; and that standstill is seen as a bellweather for the rest of the economy. It’s like watching a showdown: where housing goes (trend wise) the economy will follow.

• If they are still on the sidelines, they either have the nerves of successful poker players or the naiveté of buyers who tell their seller’s agents how much they can afford to spend.

• Unfortunately (for sellers, and for real estate agents on commission), I don’t see this improvement as bringing in many more buyers. Which is both obvious and strange. As prices go down, potential buyers will be afraid that prices will drop more, and that 1) they are paying too much and 2) they won’t be able to sell their home, further down the line. Therefore, they’ll continue to wait on the sidelines until … well, until I don’t know when.

• But I don’t buy the junk bond analogy, at least as applied to Manhattan coop or condo purchases. Seems to me that the junk bond abuse was about issuing high rate debt to finance the purchase of an entity whose operating cash could not support the debt service, so (formerly healthy) entity cratered.

[Matrix Zeppelin Series: Readers Write] Working Both Sides, Mortgage Resets, Higher Law, Housing Anxiety and Class-Polarity

Posted by Jonathan J. Miller -Friday, August 25, 2006, 1:11 PM
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Even with the loss of Pluto as a planet, Matrix readers have been cleaning the lenses on their telescopes while accepting the risk of placing the remaining planets out of alignment. Here’s a few of this weeks comments from the Matrix Zeppelin:

• I have been told numerous time that if I am representing both sides of a deal, then I am really only loyal to the deal… not the clients. This is one reason I choose not to be the main representative for both sides of a transaction. If an unrepresented seller is handed our state contract for sale, possibly with addendums, that seller will want to seek out his or her own representation from another representative in most cases. I believe it is worth the money spent to have a representative working for client interests, rather than the transactions interests. Afterall, if you are going to court you wouldn’t want the same attorney working both sides of the case, right??

• Yes, brokers and agents clearly want to close the deal, but so do the parties, so the interests align. The broker’s fiduciary duty to the client should cover advising of those instances when closing a particular deal is not in the client’s best interest. There is every reason to get advice from as many sources as you need or want, the experienced agent being one. Ditto negotiating skills.

• The problem arises when consumers do not fully understand the products they are signing up for when rates are higher when their mortgage resets. Of course, lenders see no problem with these programs because they say they inform the consumers and it helps get buyers into their new houses and do not want to discourage consumers from applyhing for mortgages. Lenders are already facing lower loan volume as rates creep upward. There is a saying I’m sure you’ve heard before… ‘Buyers are Liars’. It’s just as true for mortgage brokers as it is for real estate agents

• There are overpriced properties that are purchased and under-priced properties that are sold, and Bazerman’s point is that its not in the brokers interest to inform the buyer/seller of these inequalities.

• It is the same as my first point, or I wanted it to be, which is, that there is a “higher law” at work in any real estate transaction involving a broker and a client. An agent must act in the best interests of their principal. Consequently, the self interest of the broker must play second fiddle to the client’s interests. And my experience has shown that brokers are looking out for their clients.

• Real estate, like any market, can get ahead of itself. If you suppose, for a moment, that the long term average price appreciation of housing is 5% (probably on a “real” basis, but I suppose that is subject to debate), then periods of above 5% appreciation will eventually average out with periods of sub-5% appreciation. I think we all know which period we are in now. The problem is when the market is in “10%+ p.a. appreciation land”, it looks like it will go on forever. When it is correcting, it looks like the sky is falling. For a good example of “the sky is falling” see. Some speculators in markets that are illiquid (and housing certainly is) will get burned and forced out — which is a healthy thing in the long term. I like to think that there are fewer speculators in general in NYC than there are, say, in Las Vegas or South Florida, but I don’t know for sure. What matters is how many speculators can’t stand the heat. The strong rental market leans against the falling prices. Rental apartments in NYC are up 15% since the start of the summer. But the cash flow still isn’t good enough to buy & rent out and make some return on your cash. You will need capital gains to bail you out. When the market squeezes out those capital gains expectations (which it is doing a good job of now, but they are not all gone), that is when you know it is time to buy. Will it ever get there? It did in the mid-1990s correction. It could again. The whole “bubble” thing is probably a misnomer. Bubbles burst and are gone. Housing is a basic good and, unlike tulips, have underlying demand. Remember that in 2000, when people got burned in the internet stocks, money started to flow into housing as an alternative place for your cash. This was exacerbated after 9/11. If the cash isn’t going into housing now, where will it go? Probably financial assets….

• I feel, at this point any move by the Fed will have no effect on housing. As you mentioned, “Market psychology/mob mentality is a fragile thing.” I think everyone is a little “touched” and now has Housing Anxiety. The Fed should stick to it’s no one role (or is it mandate) and deal with inflation. The sooner we take the medicine, the sooner we’ll get better. And I agree that low mortgage rates fueled the housing boom. And then that old market psychology/mob mentality took over!

• The main reason why middle class incomed people are being priced out of the cities is tri-fold: (1) The primary problem is the irrational belief in the goodness of centrally planned zoning; that which dictates the density, dimensional proportion, usage type, etc. allowed. Of course planners are only human, so they cannot fully forsee all the long-ranging effects of their economic devestation and class-polarity housing policies. (2) the white collar workers are the direct victims of the price war, as they cannot bid away the same quality housing as the rich, and they must live in inferior housing, less choice neighborhoods, etc. (3) white collar workers are the ones subsidizing the lower classes, who thru the mechanizations of the city and state, end up bidding away the housing with the middle classes’ money!