Posted by Jonathan J. Miller -Friday, August 31, 2007, 8:40 AM
Last month, IndyMac announced that it was laying off 4% of its work force or 400 people but now is reversing course and may hire as many as 850 employees. Most of them are former employees of the now bankrupt American Home Mortgage. Countrywide did this in reverse a few weeks ago. IndyMac’s actions have got at least one of the credit agencies nervous.
Last week I was on a conference call with a lender who is doing well. They provided no subprime lending products during the housing boom. They take a contrarian position, much like IndyMac and believe that now is the time to grab market share.
While many lenders are pulling back, I suspect you will see lenders with deep balance sheets and less dependency on secondary market investors to buy paper, move in to fill part of the void. The idea that there is no mortgage money available right now is simply not true although there is definitely less of it.
Contrarian thinking abound.
Posted by Jonathan J. Miller -Thursday, August 30, 2007, 2:02 PM
Here is the August issue of Trulia Trends, a report of listing trends and consumer search patterns.
The report is based on a continuing evolution of ideas that has come as a result of the collaboration between Trulia and my firm Miller Samuel. (disclosure: I am a member of Trulia’s advisory board.)
In this month’s issue the spotlight focused on the Austin, TX area.
Download the August 2007 Trulia Trends Report [PDF] here.
Here is Trulia’s post about the new report.
Posted by Jonathan J. Miller -Thursday, August 30, 2007, 12:01 AM
On Monday NAR released their Existing Home Sales stats for July 2007 slipped only 0.2% from the same period last year.
Lawrence Yun, NAR senior economist, said the market is holding on despite temporary mortgage disruptions. â€œHome sales probably would be rising in the absence of the mortgage liquidity issues of the past two months,â€ he said. â€œSome buyers with contracts have been scrambling when loan commitments did not materialize at the last moment, while other potential buyers are simply waiting for the mortgage market to stabilize.
I believe this could fall under normative economic theory (just a wild guess…on my part). When the data doesn’t match what the author wants it say, the author says what the author wants to say anyway. Another word for this is known as “Fogging.”
June 2007 Release for Existing Home Sales – Psychological factors and people doubling up in their houses:
“I think psychological factors are currently the biggest drag on the housing market, in addition to a disruption from tighter credit for subprime borrowers,” he said. “Household formation has slowed dramatically since late 2006, implying that many people are doubling-up â€“ theyâ€™re adding roommates or moving in with parents.”
April 2007 Release for Existing Home Sales – The weather is to blame:
David Lereah, NAR’s chief economist, expected the drop. “For the last couple months we’ve been expecting a weather ‘hit’ on home sales finalized in March, but looking at overall activity in the first quarter we see that existing home sales averaged 6.41 million — a figure that is moderately higher than the sales pace during the second half of 2006,” he said. “We also may be seeing some losses as a result of the subprime fallout. However, this is masking improved fundamentals in the housing market, with lower mortgage interest rates and motivated sellers.”
Ok, back to the August release…
The reason Yun gave as to why home sales prices didn’t rise in August… was due to the credit crunch. However, the July closings in this report didn’t include sales during or after the credit crunch began in mid-July because these sales went to contract in June or early July. In other words, the statement applied to conditions not evident in the report data.
Its an interesting argment but made subject to an error in time slicing. The comment would have made more sense next month. Why is this sort of thing said nearly every month? Its not fair to the consumer.
Posted by Jonathan J. Miller -Tuesday, August 28, 2007, 8:03 AM
Ok, I am off to the US Open Tennis tournament for the day in Queens, NY. Courtside. Of course I will be thinking about the housing market the entire time in nominal terms (read on) with plenty of topspin.
The assumption that people think rationally about their money, ergo housing, has been tested a lot over the past decade. The phrase money illusion, is the idea that people think of money in nominal, rather than real (adjusted for inflation), terms. There are distinct camps of economists at either end of this concept with probably more against the concept of money illusion. Here’s an example given in wikipedia:
people generally perceive a 2% cut in nominal income as unfair, but see a 2% rise in nominal income where there is 4% inflation as fair, despite them being almost rational equivalents.
Of course, my own illusion is that I always have a lot more than I actually do. I suspect this phenomenon is called insulated by reality. In the real estate brokerage business, a case could be made for an agent who has a great month of sales, and then multiplies it by 12 and feels they had a great year. Pure illusion, but it helps them get through the day, I suppose.
In reference to housing, if your mortgage rate is fixed at a low rate, and inflation falls, your borrowing costs rise. Its enough to make me take stock of my nominal lifestyle.
but I digress…
An argument for the validity of the concept of money illusion, is the fact that nominal prices are slow to react to changes in inflation. In society, there is a lack of understanding by the consumer and the media ( and appraisers), as well as little understanding in contracts and law about the differences in nominal and real prices.
Here’s some interesting discussion on Money Illusion from the University of Copenhagen.
A striking example comes from the housing market. Housing prices have risen sharply in several countries, and booms followed by busts are common in housing markets. Money illusion in the guise of a confusion of nominal and real interest rates may be partly to blame. When inflation is low, monthly nominal interest payments on mortgages are low compared to the rent of a similar house.
Housing prices therefore seem cheap, causing illusion-prone buyers to buy rather than rent which, in turn, causes an upward pressure on housing prices when inflation declines. However, decreasing inflation also increases the real cost of future mortgage payments. Investors who base their decision on the salient low nominal mortgage payments but ignore the less visible effect of inflation on the future real mortgage cost are prone to an illusion.
The concept of money illusion is controversial because of the strong belief that people ultimately behave rationally when it comes to their personal wealth. I find this hard to believe, having gone through the latest housing boom and there was limited rational behavior. Here’s a research paper on the subject [pdf]. Its over my head, but the abstract was interesting.
Posted by Jonathan J. Miller -Tuesday, August 28, 2007, 12:01 AM
This report is provided by Jeffrey Otteau of the Otteau Appraisal Group who also authors a series of widely followed quarterly market reports on the New Jersey real estate market. This information is collected from various sources including Boards of Realtors and Multiple Listing Systems in New Jersey.
I have known Jeff for many years and consider him one of the leaders in the real estate appraisal profession. He has taught me a lot about quantitative real estate market analysis.
HOUSING MARKET IMPROVES SLIGHTLY, INVENTORY STOPS RISING
The decline in the housing market which began during the 2nd half of 2005 is evidenced by the rising tide of unsold homes on the market. While there are many contributing factors, the supply of competing properties is paramount as it creates a â€˜mood of the marketâ€™ which determines whether home buyers feel any sense of urgency. For example, as Unsold Inventory declines and a buyerâ€™s choices diminish they are inclined to purchase sooner rather than later driving inventory even lower and home prices higher in the process. Conversely, rising inventory extends normal marketing time causing home sellers to reduce their asking price. In this rising tide environment home buyers adopt a â€˜wait & seeâ€™ stance due to concern about falling home prices, leading to further increases in Unsold Inventory and thus creating a downward spiral. Any reverse of this cycle is then predicated upon a decline in Unsold Inventory. While this is admittedly a simplistic view which does not take into account corresponding demand factors, the bottom line is that the housing market can not improve significantly until Unsold Inventory declines. And the first step toward inventory decline is for it to stop rising.
The New Jersey housing market provided a glimmer of hope in July as Unsold Inventory declined for the first time since January. That this decline accounted for less than a 1% reduction in Unsold Inventory makes it clear that the housing recession is far from over and will continue into 2008. However, should inventory hold at its present level would signal the â€˜beginning of the endâ€™ for the housing recession.
The July housing market also saw an increase in contract-sales activity on a seasonally adjusted basis. As demonstrated in the NEW JERSEY CONTRACT-SALES ACTIVITY chart, July sales were higher than one year ago confirming that while the housing market is weak it still has life. No surprise here as despite the decline in sales activity over the past 2 years the underlying demand for housing is still bubbling beneath the surface. This is because life goes on with continuing household formation, marriages, the birth of children, job promotions, divorce and retirement all leading to changing housing needs which translates into housing demand. Thus, the stage is being set for a rebound in the housing market once the current challenges sort themselves out.
From a market absorption perspective, the Unsold Inventory presently reflects a 9.0 month inventory of homes as compared to 8.9 months in June. This however compares to a 4.0 month supply in July 2005 suggesting that inventory is currently about double where it needs to be before home prices will start rising again. This is important to would-be home sellers who are considering waiting things out before selling their present homes as any rise in home prices is likely several years off.
Posted by Jonathan J. Miller -Monday, August 27, 2007, 5:00 PM
The research for this monthly market report is provided by Brad Rundbaken, of Advantage Commercial Capital Inc., a real estate appraiser, consultant and investor with a stock brokerage background. He analyzes the Charleston real estate market using the Charleston-Trident MLS and inserts a lot of extra analysis on the national housing market. In fact, he crams it in there and he’s not afraid to share his opinions. He was terminated by his former employer (an appraisal firm) once he started publishing his market stats in 2006. However, honesty pays and his new consulting business is thriving.
Brad also runs a great blog. Here are the areas he covers and his methodology
There are more than a dozen other market areas covered in the report but you need to scroll down to the bottom of his report page to find ‘em.
Posted by Jonathan J. Miller -Monday, August 27, 2007, 3:00 PM
[This market recap on the Northern Virginia from MLS data is compiled by Butch Hicks, a former president of RAC (Relocation Appraisers and Consultants) (that I am a member of), a friend and an experienced appraiser in Northern Virginia. The results of his efforts are published on his web site as a series of charts, each with a brief summary. (As a kid growing up in the Washington DC area, I was bombarded by "Virginia is for Lovers" tourism ads, and of course "DC is for US, by George")] -Jonathan Miller
View the charts [BHicks.com]
Rising inventory, flat sales levels and prices slipping…same news as March 2007.
Here’s a sample of the charts available online.
- The median price paid at the end of July, 2007 was $452,167, a decrease of 1% from the same time period 12 months earlier.
- At the end of July, 2007, inventory was eight months, an increase of 24% from one year earlier.
Posted by Jonathan J. Miller -Monday, August 27, 2007, 10:00 AM
This quarterly market report is provided by Dr. Kevin Gillen, an economist at the Real Estate Department of the Wharton School and Fellow of the University of Pennsylvania. He analyzes the Philadelphia real estate market using the city’s real estate database through Hallwatch, a watchdog group. The results are published in a research paper called Philadelphia House Price Indices each quarter as a public service to the Philadelphia real estate community. Here’s his methodology [pdf].
The report is always informative and I am glad I am able to present his efforts on Matrix -Jonathan Miller
Download the full report [pdf].
Read the Hallwatch article on the market: Philly Real Estate: Mixed Signals Suggests Transition
The Philadelphia real estate market is characterized by a modest increase in prices, but a lower level of sales activity. Here’s a few salient points made by Kevin:
6,058 homes changed hands under arms-length conditions during the second quarter, the slowest second quarter since 2003. Volume was up 17% from this past winter, but down 16% from a year ago.
The price indices indicated that prices rose a healthy 3.7% on a quality- and seasonally-adjusted basis, a shade less than last yearâ€™s increase of 4.4%.
More discussion concerning the report [Hallwatch.org]. Hallwatch is a private and independently maintained watchdog website that does a lot of in-depth, independent and investigative pieces on city politics, as well as real estate.
Posted by Jonathan J. Miller -Monday, August 27, 2007, 12:01 AM
In Time Magazine’s commentary piece by Michal Kinsley in last week’s issue
Your House Is Worth Less? Good
we get lectured on how no one benefits from rising housing prices except for the elderly. Its a surprisingly simplistic take on the housing market problem (albeit commentary) from a national publication, and I guess thats the problem in general. No one really seems to have their arms around whats wrong with the housing market.
Some, mostly young folks, are trying to buy their first home. Some, at various stages of midlife, own a home but will trade up someday, or at least think about it. And some, mostly older, are trying to sell and downsize. Who is served by soaring house prices? Not the first group: rising prices make it hard for those people to get into the game. Not the second group: what it will have to pay for a bigger house is probably increasing faster than what it can get for the current one.
The author indicates that a real estate collapse could be a good thing:
- Greed takes it on the chin: ie easy money, foolish buyers and lenders, they all get theirs, etc. Renters look at buyers and are able to say I told you so, that sort of thing.
- Houses don’t produce anything: When they sell, its like selling a used record (my analogy), the artist and record company don’t make a dime when it sells again. Of course, it produces shelter, which is needed by the population. He uses an onion analogy (which makes me want to cry). He says there aren’t millions of onion owners counting on the value of their onions to keep going up year after year.
People want the government to do something, and presidential candidates are beavering away at plans. But any plan that would prevent home prices from declining would be foolishness squared. Genuine tragedy deserves sympathy and help, even if it is the result of your own foolishness. But when we do not even guarantee basic health care, it would be nuts to think about making protection against real estate losses part of the social safety net.
I don’t think it is the government’s charge to rescue investors who made poor decisions. Of course, fraud is another story. Let the markets decide. I think thats why Bernanke waited so long to take action before the rate cut and gave the impression of waffling on whether or not to take action. He was hoping the markets would figure it out, and maybe they will.
However, bad choices or not, fraud or not, the housing problems are spilling into the overall economic picture, which for goodness’ sakes, many of us have been saying for more than a year. Much has changed over the past month with the mortgage market turmoil.
I now think the Fed has no choice but to lower the federal funds rate and the markets are predicting it. It probably won’t have any near term affect on mortgage rates, but will help the other areas of credit. A recession is no one’s friend.
Posted by Jonathan J. Miller -Monday, August 27, 2007, 12:01 AM
Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related images(s).
David Leonhardt of the New York Times, does a very cool breakdown of the Nation’s housing markets, to prove incorrect the mainstay argument that housing prices, based on OFHEO numbers (the official government stats), have not shown an annual decline since their inception in 1950. Because OFHEO excludes all transactions with non-conforming mortgages (currently over $417,000), a large swath of data is excluded, especially in the coastal cities where housing prices are higher.
It should be pointed out that OFHEO also includes the appraised value of refinance transactions, which can be the majority of the sales data captured by Fannie Mae and Freddie Mac in a certain period of time.
He instead relies on the numbers provided by Case Shiller which do not exclude non-conforming loans like OFEHO does (however, Case Shiller does exclude new construction, condos and foreclosures, which have been key components of the housing market boom of the past 5 years).
David does a wonderful job at explaining the methodology in the video and the interactive graphics are amazing. He emphasizes using inflation in the presentation of housing prices.
Click here for interactive graphic and short video on the US housing market.
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