[Three Cents Worth] Bonus Spending Power Cut

Posted by Jonathan J. Miller -Thursday, February 26, 2009, 6:08 PM
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Sure happy it’s Thursday to share my Three Cents Worth on Curbed, at the intersection of neighborhood and real estate.

Click here to view this week’s post.

Check out previous Three Cents Worth posts.

[Gavel Development] Real Estate Auctions Are An A1 Story

Posted by Jonathan J. Miller -Thursday, February 26, 2009, 3:00 PM
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Weirdest thing – my original post was wiped out – must have been auctioned? – or was it my newly installed Safari 4 beta?

Well today was especially fun (after a 2.5 hour session at the dentist) because I was referenced in a front page story of the New York Times (I think it’s the 9th time and it never gets old). Teri Karush Rogers wrote a story about condo auctions called: And Do I Hear $2 Million? No? $1 Million? Sold! (fun to see this in Paris too).

Auctions are a way for the developer to get out of a project more quickly than existing marketing conditions permit and is usually done in markets with rapidly rising inventory (aka more competition).

An auction is a way to compress marketing time from the market norm which current is measured in terms of years, into a few days.

In the early 1990s, many co-op conversion stalled during the recession and the construction lenders became the new sponsors of thousands of co-op apartments. The auction became an effective marketing tool and was used quite extensively during this period.

In many cases, the developer of a building with stalled sales, has no choice because they don’t have the staying power to wait until the market recovers. At the same time the lender behind the developer may be reluctant to weaken their already weak balance sheet because it has implications for capitalization and their ability to perform lending in other areas of the institution.

Real estate auctions, rarely used in New York, have the potential to both move property and indicate to reluctant buyers what the true market prices are. Given the current sales drought, even a handful of auctions could reset prices for new condominiums citywide, said Jonathan J. Miller, the president of Miller Samuel, a Manhattan research and appraisal company. He said he expects the auctioned properties to sell for 40 to 45 percent below the asking prices of the first quarter of 2008, when the market peaked.

In the current market, the contraction of credit has restricted the demand for these housing units which is placing downward pressure on price levels.

“The general impression I get is that this period of denial — the market-will-get-better mentality — is coming to a close,” said Mr. Miller, the appraiser…

[Real Estate Quant] The Formula That Killed Wall Street + Housing

Posted by Jonathan J. Miller -Wednesday, February 25, 2009, 6:53 PM
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One of the most perplexing things I have not been able to get my arms around in the aftermath of the mortgage securitization/CDO collapse is: how did some many smart people get it so wrong?

Felix Salmon, one of my favorite econ writers and prolific blogger at Portfolio writes an amaziningly clear piece on this subject in Wired Magazine (I’m a long-time fan, but how many years can they go before they make money on it?) called Recipe for Disaster: The Formula That Killed Wall Street. It’s worth a thorough reading. I’d even consider reading it more than once.

It talks about the increased reliance on “brainy financial engineers” called quants and how they were focused on modeling risk without paying attention to historical trends as it relates to mortgage securitization (and we now understand the ultimate impact on housing markets).

In 2000, while working at JPMorgan Chase, Li published a paper in The Journal of Fixed Income titled “On Default Correlation: A Copula Function Approach.” (In statistics, a copula is used to couple the behavior of two or more variables.) Using some relatively simple math—by Wall Street standards, anyway—Li came up with an ingenious way to model default correlation without even looking at historical default data. Instead, he used market data about the prices of instruments known as credit default swaps.

The phrase “don’t kill the messenger” (probably used by many ethical appraisers commiserating about delivering bad news to a lender who didn’t want to hear it) applies here. This engineer profiled created a formula and the masses loved for its simplicity and were blinded by high profits, never looked deep enough to understand its misapplication.

Nassim Nicholas Taleb, hedge fund manager and author of The Black Swan, is particularly harsh when it comes to the copula. “People got very excited about the Gaussian copula because of its mathematical elegance, but the thing never worked,” he says. “Co-association between securities is not measurable using correlation,” because past history can never prepare you for that one day when everything goes south. “Anything that relies on correlation is charlatanism.”

It seems that smart people do not have all the answers. Here’s a nobel laureate in economics on Wall Street whose firm just filed for bankruptcy.

[In The Media] Fox Business 2-23-09

Posted by Jonathan J. Miller -Tuesday, February 24, 2009, 1:44 AM
5 Comments

Today I was invited to appear on Fox Business Live with Alexis Glick and Connell McShane. Before we got started, I plugged my Twitter address because Twitter was discussed at length during the prior segment before I came on the set and Connell was hard-selling live blogging, Facebook and Twitter interaction on the show. Fun!

The segment was called: “Future of the Housing Market” runs about 6 minutes. I was paired with Tony Crescenzi of Miller Tabak, who was very sharp and easy to understand. He was the guest for the whole hour and I was brought in for one spot within the show.

View the clip.

Crains New York Business Economic Spotlight Chart – February 2009

Posted by Jonathan J. Miller -Monday, February 23, 2009, 12:05 AM
1 Comment

I have had the pleasure of providing a monthly chart for the Economic Spotlight section of Crain’s New York Business magazine since September 2003. Here is the latest, which appears in the current issue of Crain’s New York Business.

Source: Crain’s New York Business

Go here for a complete archive of my Crains’s New York Economic Spotlight charts that have been published. They are organized by year.

Another Way To Look At What You Are Saying

Posted by Jonathan J. Miller -Sunday, February 22, 2009, 9:30 PM
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I was reading TechCrunch, an essential resource on technology. The post was about a service called “Wordle” which is described as

a toy for generating “word clouds” from text that you provide. The clouds give greater prominence to words that appear more frequently in the source text.

It takes feeds from a blog to create the graphic.

I thought it would be a good way to check out Matrix periodically to see what I am emphasizing at the moment.

Apparently my word of the day seems to be “failures”.

See the redux on Soapbox.

[14 and Counting] Banks Are Failing (To Lend)

Posted by Jonathan J. Miller -Sunday, February 22, 2009, 2:01 AM
1 Comment

I thought it was time to check back in with the pace of bank failures. The FDIC began publishing a list of bank failures in October 2000:

The top 3 years with the most failures were:

• 2009 – 14 failures in first 1.5 months – thats 104 annualized.
• 2008 – 25 failures.
• 2002 – 14 failures immediately after the 2001 recession – 9/11.

The conventional wisdom that bank failures should be more of a concern than other types of firms in a weakening economy may not be entirely correct.

However, correlate the failure rate with banks’ rise of excessive exposure to mortgage lending and it makes sense.

After I did my chart, I came across a CNN/Money story expressing the same concerns.

About 150-300 banks are projected to fail during this recession. The last big surge of bank failures was in the late 1980s.

[Three Cents Worth] Absorption Crossing the Blue Line

Posted by Jonathan J. Miller -Friday, February 20, 2009, 11:07 PM
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It’s Friday – late – so it is one day after my usual Thursday spot to share my Three Cents Worth on Curbed, at the intersection of neighborhood and real estate. I was away this week and gave my post in advance, but Curbed, in its search of journalistic excellence, forgot to post it yesterday. An interesting series of comments ensued.

Click here to view this week’s post.

Check out previous Three Cents Worth posts.

[Matrix Hiatus] On Vacation

Posted by Jonathan J. Miller -Tuesday, February 17, 2009, 1:58 AM
1 Comment

Here’s a rehash of something I concocted last year: A chart based on the percent change in cpi-adjusted quarterly median sales price from the prior year quarter using the “surface” charting function in Excel. A poor man’s SSPS.

Quilting never looked so good.

I’ll be on vacation this week, thinking of nothing else but housing market trends, credit contraction, stimulus spending et al.

Ok, not really.

[Book Matrix] Cracks In The Foundation With Humor To Build On

Posted by Jonathan J. Miller -Monday, February 16, 2009, 12:06 AM
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In this crazy economic world, we are probably in dire need of some levity. Erica Ferencik (pronounced “forensic” – certainly one of the most interesting last names around), a former stand-up comedian and active real estate agent working hard in this tough environment, has written her first book, Cracks In The Foundation.

Since I began blogging here in 2005, I have been sent many books to review. I don’t review the majority I receive but I end up referencing them if I liked them and include other books I have read whenever possible. I enjoy the process so keep sending ‘em.

I had the pleasure of speaking to Erica a few weeks ago and found her to be disarmingly interesting and made me want to read her first book Cracks In The Foundation which she sent me. It’s gotten great reviews.

I enjoyed the book and highly recommend it.

Given her background, I can only imagine the application of humor in her current profession. Perhaps when buying or selling a house, besides professionalism, one can also expect the experience to be fun.

After all, we are all in the outhouse at the moment. Why not enjoy it?