Posted by Jonathan J. Miller -Tuesday, March 31, 2009, 12:22 AM
Sorry but I am in Manhattan Market Overview high gear prep mode – the report will be published later this week – so I am pretty lame on the content side for Matrix at the moment.
One of my semi-regular podcast downloads is Russ Robert’s EconTalk. This week he interviews Nassim Taleb , the author of Fooled by Randomness and the Black Swan of a few years ago. I own the latter, but I think the former is over my head. I’ve never heard him speak before. I have now listened to this podcast 3 times already and thoroughly enjoyed it. Also make sure you read the slew of comments posted to their site.
Nassim Taleb talks about the financial crisis, how we misunderstand rare events, the fragility of the banking system, the moral hazard of government bailouts, the unprecedented nature of really, really bad events, the contribution of human psychology to misinterpreting probability and the dangers of hubris. The conversation closes with a discussion of religion and probability.
On one hand I am very leery of people who suggest they have all the answers to a problem but not the solutions – Nouriel Roubini is another example – but Taleb’s arguments are compelling. After all, I think we all want to understand how so many smart people could be so utterly stupid for so long. If it wasn’t mortgages as a vehicle, it would have been something else.
I loved the ten year flood example given in the notes of the interview:
A ten year flood has a higher probability than a 100 year flood, but the 100 year flood will be massively more consequential. You care about the probability times the size of the impact, the expectation of these events. Small-probability events can have in some domains, fat-tailed domains, a big impact and we don’t know how to estimate them.
Here’s the compensation scenario and moral hazard – notes from the interview:
Were heads of Bear Sterns and Lehman Brothers not aware of how much they were gambling or did they not care how much they were gambling? Combination. Three things: 1. fooling themselves, psychological dimension. 2. Had an interest in building huge risks and tail because if you blow up every 10 years, you will make 9 bonuses and the 10th year someone will pay the cost, not you. Vicious: taxpayers are paying retrospectively for the bonuses of the first 9 years. Banks are insolvent, have lost more than their capital base, but managers have kept their bonuses. Some of them have been wiped out because they went a little further than normal blow-up cycle. What about the ones who didn’t do it? Lower returns year after year; now should be doing extremely well, but now unable to buy up some of the firms that have made the mistakes because the government is propping them up.
Aside: Speaking of dumb, how about the new space station named “Colbert” and video. To see the vote page and the number one suggested name – go here.
Posted by Jonathan J. Miller -Friday, March 27, 2009, 11:30 PM
This morning I was invited to be a guest to talk about appraisers and how they are impacting the flow of housing sales. I was initially concerned that this would be an appraiser slam piece, blaming our industry for killing sales, causing global warming and low salaries of central bankers but it wasn’t and I think I covered the bases. Kinda surreal – met and spoke briefly to Dick Morris in the green room. Cavuto was very personable before the segment, we talked about the issue before we went on.
- Sellers are generally a year behind the market
- The ranks of good appraisers were decimated by the mortgage boom
- Appraisers have long been the “punching bag” of blown deals
- Lack of data is a huge issue
Connie De Groot, who was the Beverly Hills real estate agent who is a regular on FBN recommended that buyers get an appraisal when pricing their property for sale – as Cavuto commented on my neutraility point, a “Swiss Appraiser.”
Watch the clip here or you can watch it here.
Posted by Jonathan J. Miller -Thursday, March 26, 2009, 6:12 PM
Sure happy it’s Thursday to share my Three Cents Worth on Curbed, at the intersection of neighborhood and real estate. This week I get volatile.
Click here to view this week’s post.
Check out previous Three Cents Worth posts.
Posted by Jonathan J. Miller -Thursday, March 26, 2009, 12:58 AM
Ok, so we always need to blame someone because it lets us off the hook and it can make the issue more tangible. In the world of housing, the biggest target of blame is generally the media. I hear this at most real estate functions.
- The media distorts the negative aspects of real estate
- The media doesn’t look deep enough into the housing market in order to explain what is wrong with it
- The media scares buyers away
- The media hype kept me from making that sale last month
Really? No, really?
- The media caused me to drop my entire Oreo cookie in my glass of milk.
Ok, not really. I just threw that one in there. I’ve always been bothered by this positioning besides the negative energy (whining). Is the media part of a big conspiracy?
I am not an apologist but were the media blamers complaining about the housing market hyperbole when it was on the way up?
I’ll say this – some reporters get stories wrong and some real estate agents don’t sell houses. Yet does media error and hyperbole actually make an adverse impact? Even create an asset bubble?
Here’s another way to look at the issue as presented in Catherine Rampell’s Economix post:
The media â€” especially as embodied by Jim Cramer â€” has been accused of starting, perpetuating or inflating bubbles. A new study looks at the dotcom bubble of the late 1990s and declares otherwise.
News coverage tended to increase around public offerings but there wasn’t a noticeable impact on stock prices. The same could be applied to the most recent asset bubble: housing.
Yes, the media basically behaved badly, but its bad behavior did not appear to have much influence.
View early draft of research paper: THE ROLE OF THE MEDIA IN THE INTERNET IPO BUBBLE.
And don’t forget to blame the weather too.
Posted by Jonathan J. Miller -Wednesday, March 25, 2009, 12:13 AM
Ok so we see an endless parade of housing stats (guilty as charged) and lately the news seems to be better, no?
The Federal Housing Finance Agency released their stats (covering conventional mortgage data – sub $729k mortgages) – They used a month over month headline:
U.S. Monthly House Price Index Estimates 1.7 Percent Price Increase From December to January
U.S. home prices rose 1.7 percent on a seasonally-adjusted basis
from December to January, according to the Federal Housing Finance Agencyâ€™s monthly
House Price Index. Decemberâ€™s previously reported 0.1 percent increase was revised to a
0.2 percent decline. For the 12 months ending in January, U.S. prices fell 6.3 percent. The
U.S. index is 9.6 percent below its April 2007 peak.
Jan-Feb % change spiked last year and did the same this year, but somewhat higher. Here’s a look by Justin Fox at Curious Capital.
However, quarterly showed a large fall off in 4Q 08 so it will be interesting to see how Q1 09 shakes out.
The National Association of Realtors released their Existing Home Sale Report yesterday. They used a month over month headline:
Existing-Home Sales Rise In February
Existing-home sales â€“ including single-family, townhomes, condominiums and co-ops â€“ rose 5.1 percent to a seasonally adjusted annual rate1 of 4.72 million units in February from a pace of 4.49 million units in January, but are 4.6 percent below the 4.95 million-unit level in February 2008. Seasonal adjustment factors are more volatile in winter months, but sales rates over the past few months show dampened sales activity.
In other words, existing home sales are lower than last year. However, Calculated Risk and Chris Martenson counters NAR spin showing that the 5.1% increase is pretty ho-hum.
New Home Sales stats are being released Wednesday and consensus is a pace of 300k down from 309k last month.
The S&P/Case Shiller Indices are being released in a week (March 31) but not turn is predicted.
What does all of this mean? It means that there remains enormous spin from trade groups and government agencies. It means that consumers need to be skeptical of month over month gains because of seasonality.
Is there a possibility that housing is improving nationally? Not really but hope is a powerful thing that I try to consider month to month.
Posted by Jonathan J. Miller -Tuesday, March 24, 2009, 12:05 AM
One of the biggest issues facing higher priced housing markets as of late, has been the absolute lack of jumbo mortgage financing. The TARP, TALF (and BARF – Bank Asset Relief Fund) only address mortgages within the parameters of Fannie Mae, ie conventional and jumbo conventional financing. In Manhattan that’s about $729k and with an average sales price just under $1.6M, a lot of homeowners are having great difficulty in obtaining mortgages with more than a 50% LTV.
This Bank of America announcement is great news for this sector of the housing market and may spark other interest in the sector.
Kenneth R. Harney’s must-read WaPo column “The Nation’s Housing” covers this announcement this week in his article: A Big Boost for Buyers Seeking Jumbo Loans:
Bank of America, the country’s largest mortgage lender, is rolling out a large program to finance jumbo loans between roughly $730,000 and $1.5 million, with fixed 30-year rates starting in the upper 5 percent range. The loans will be available through the bank’s retail network and also through its Countrywide Home Loans subsidiary. After April 27, Countrywide will be rebranded — shedding the name it has had since 1969 — and morph into Bank of America Home Loans. Bank of America acquired Countrywide, once one of the biggest subprime lenders, last year.
So Countrywide becomes Bank of America Home Loans.
Last week, Landsafe, the appraisal management company arm of Countrywide approached us to be approved as an appraiser. Their quality people have met with us many times but for some reason, the sales function didn’t allow our type of firm to connect because you had to rub elbows with loan reps at each of their offices. Crazy bad.
I believe that has all been changed or is being changed for the better.
However, although we are state certified and likely because of all their problems with appraisal quality, their efforts to right the wrongs effective screen out qualified appraisers. They wanted among other things:
- our social security numbers
- credit card numbers?
- driverâ€™s license #’s
- date of birth
- consumer reports containing illness records and medical information
Seemed pretty aggressive to us. What about identity theft concerns?
The irony of this sort of scrutiny is pretty powerful given past practices. Hopefully once things begin to run more smoothly and one hand knows what the other is doing, they’ll reconsider trying to attract qualified appraisers. We’ll wait patiently.
Posted by Jonathan J. Miller -Monday, March 23, 2009, 11:32 PM
Who says the Dow Jones Industrial Average has anything to do with the outlook for the housing market?
I am certainly skeptical, and get downright annoyed every time someone would refer to the DJIA result that day as a litmus test for some sort of national mood.
Yet people seem to be feeling a little better about things (the economy/housing) today than a few weeks ago. Here’s a chronology of cause and effect (DJIA rises and home sales rise) conveniently edited to make my point:
First of all, this has been one heck of a busy news cycle and the path from DJIA to rising home sales is obvious.
Secondly, I need to splash some cold water on my face and get back to work.
Aside: we don’t need bipartisanship.
Posted by Jonathan J. Miller -Monday, March 23, 2009, 11:21 AM
Last week, Dan Gross at Newsweek wrote a fun piece on Slate/Newsweek called “Jump” (not a a correlation with the old Van Halen song). Basically he says that nothing the government can do will fix the economy unless we participate.
In the grips of a bubble mentality, weâ€”as investors, consumers, and businessesâ€”blithely assumed risk and convinced ourÂselves it was perfectly safe to do so. We bought houses with no money down, took on huge amounts of debt, and let the booming stock and housing markets perform the heavy lifting of saving.
I remember the ridicule the former president took for his previous economic fix after 9/11 – “Shop!” else we enter the “paradox of thrift.“
If everyone saves during a slack period, economic activity will decrease, thus making everyone poorÂer.
We also need to start investing againâ€”not necessarily in the stocks of Citigroup or in condos in Miami. But rather to build skills, to create the new companies that are so vital to growth, and to fund the discovÂery and development of new technologies.
I am not suggesting that shopping is solution, but it is certainly part of the problem right now. When consumers and investors hunker down and do nothing, a failure spiral results.
Today Secretary Geitner announces the plan we have been waiting for, which is heavily reliant on the private sector. US Treasury secrectary Geitner unvailed his second attempt at getting the economy moving again and this time there is probably no room for a do-over. Did he really call it “My Plan”?
We cannot solve this crisis without making it possible for investors to take risks. While this crisis was caused by banks taking too much risk, the danger now is that they will take too little. In working with Congress to put in place strong conditions to prevent misuse of taxpayer assistance, we need to be very careful not to discourage those investments the economy needs to recover from recession. The rule of law gives responsible entrepreneurs and investors the confidence to invest and create jobs in our nation. Our nation’s commitment to pursue economic policies that promote confidence and stability dates back to the very first secretary of the Treasury, Alexander Hamilton, who first made it clear that when our government gives its word we mean it.
Of course Hamilton was shot dead in a duel. Let’s hope this strategy has a quicker draw and better aim.
Here’s the official press release and fact sheet posted this morning.
Here’s the problem with the AIG bonus outrage that fueled this modification of plans – it’s not about being scared of keeping AIG and other Wall Street firms afloat and it’s not about the obscene lack of morality – it’s about the danger of scaring off the private sector from participating in the solution. It’s called “Free Market.”
Council of Economic Advisers Chief Christina Romer said:
“We’ve got banks with a lot of toxic assets, what ‘toxic’ means is they are highly uncertain … so that is certainly the big picture, and that is going to be the main reason for doing this … We simply — we simply need them. We need them — you know, we’ve got a limited amount of money that the government has to go in here, so we need to partner, not just with private firms, but with the FDIC, with the Fed, to leverage the money that we have,”Â she said.
$165M AIG bonuses (actually it’s $218M) and it’s symbolism of greed have been a distraction and we have to be very careful of taking our eye off the ball. Cut out the “Main Street versus Wall Street” homilies and let’s fix this.
Congress underestimated consumer outrage and the House quickly passed retribution legislation to get even via a 90% tax. Because the political playing field is incentivized by one-upsmanship, Congress is much more comfortable with this sort of grandstanding/finger pointing and that’s what this debate has regressed to. Dodd is in hot water.
It began with the previous legislation of caps on Wall Street compensation (when Congress didn’t catch it), while a feel good measure, is also a short sighted position much more apparent now because there will always be work-arounds.
I love how many simply lump all Wall Streeters into one evil pile and feel it’s right to treat everyone the same. It’s professional prejudice on steroids. A market for the “toxic” assets needs to be fostered. Do we want to get out this mess or not? No room for populist shortsightedness.
More on the plan later. In the meantime I need to download that song from iTunes - it’s systemic so we might as well jump.
Posted by Jonathan J. Miller -Sunday, March 22, 2009, 11:40 PM
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.
Posted by Jonathan J. Miller -Saturday, March 21, 2009, 7:56 AM
Our commercial advisory firm just released its New York City Income Property Market Report for the second half of 2008 for Massey Knakal. My commercial valuation partner John Cicero prepares the report. It’s the only report of its kind that covers the New York City commercial market.
Here’s what he says:
The Massey Knakal Income Property Report that I prepare on behalf of the brokerage firm was just released for the second half of 2008. The report is the only one of its kind that tracks cap rates, income multipliers, price per square foot and number of sales for the New York City multi-family market. As this report included only those sales (above $500,000) that closed from July 1 through December 31, it includes sales closed before and after the market turn in mid-September, when Lehman collapsed and the credit markets seized.
The number of sales dropped 45% from the second half of 2007 to the second half of 2008. Relative to the prior year the greatest declines were in Manhattan and Northern Manhattan, both down 54%, and the Bronx, down 60%. Year over year there were 37% fewer sales in 2008. This suggests a turnover rate of 1.9%, down from 3.0% in 2007 (of the categories tracked).
Massey Knakal will distribute nearly 300,000 hard copies of the report over the next few months.
Massey Knakal New York City Income Property Market Report [2H08]
Report Methodology [Miller Cicero]
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