Posted by Jonathan J. Miller -Friday, January 28, 2011, 11:27 AM 4 Comments
Guest Columnist: Joe Palumbo, SRA
Palumbo On USPAP is a column written by a long time appraisal colleague and friend who is currently the Director of Valuation at Weichert Relocation Resources and a user of appraisal services. He spent seven years at Washington Mutual Bank where he was a First Vice President. Mr. Palumbo holds an SRA designation, is AQB certified and he is a State Certified residential appraiser licensed in New Jersey. Joe is well-versed on the ever changing landscape of the Uniform Standards of Professional Appraisal Practice [USPAP] and I am fortunate to have his contributions. View his earlier handiwork on Soapbox and his interview on The Housing Helix.
-Jonathan Miller
USPAP {Un}common Sense
It’s hard to believe that I am now reading the 4th exposure draft issued by the Appraisal Standards Board of the Appraisal Foundation on December 10, 2010. It seems like only last week when we all clamored about the 2010-2011 changes to USPAP, most notably, the changes to the Ethics Rule and the disclosure of prior services performed on a property. I leave that to rest for now since we have had plenty of time to debate the impact on the appraisal community and benefit to the public, which is the major impedes for all USPAP changes. There were certainly many lively debates that took place on the topic in and out of classrooms all over the country.
As we move on to 2011 and look ahead I want to present some perspective of the entire USPAP concept, brought to light interestingly enough, by a non-licensed appraiser- student in a 15-hour USPAP class that I had presented in November. Actually this person has very little practical experience to speak of but like many of the newcomers in the industry today she is taking all the courses in succession. This approach, while not the best approach to say the least, is what is happening these days, like it or not. The just-add-water=career concept has invaded the appraisal profession. Years ago it was the practical experience you gained first or in conjunction with the course work. Licensing has a lot to do with the “fast-track” mentality. Whatever the case or the disposition of the students, I usually give the 15-hour USPAP class the speech about how “difficult or different” the 15-hour USPAP course is say versus a Capitalization or Appraisal Principles class. Numbers and definitions are one thing, ethical concepts and interpretations are another. In a math class there can only be one answer, in a class of terms and principles, they are usually straight forward. Even so, there are several areas of USPAP that can be seen as common sense. This discovery was not mine alone but it was made by “Student X” during our 15 hours together.
Here are a few of “Student X’s discoveries. While discussing the merits of the Competency Rule, “Student X” asked, “Are there appraisers out there who take on assignments without knowing how to do an appraisal?” It seems to me like one should be confident in his or her ability or don’t do the appraisal”. “Isn’t this common sense?” “Right!” some of the students quipped, “problem is they think they are competent but their work indicates something else”. One of my favorites occurred during our discussion of Standard Rule 1-5 both “a” and “b”. This Standard requires the appraiser to “analyze” both the current agreement of sale and the prior sales that have occurred in within 3 years. When I gave examples of “shortcomings” I noted that some appraisers don’t indicate what efforts they made in the normal course of business to obtain a sales contract let alone provide a “dissection or breakdown” of the agreement. We talked also talked about the details of the current listing information sometimes missing. Student X responded about this being a “no-brainer”. Her comment was something like, “I would think the details of the contract, what the listing says would be very important in determining possible fraud, what may be included in the sale, or even just trying to piece the transaction together”. Student X went on about the 3-year prior sale, “geez aren’t most users going to ask about it anyway?”. “Just stating what it sold for does not seem like a big help either”, “a lot of this stuff seems to be common sense”. BINGO I cheered….and these types of dialogues went on a few other occasions over the 2-day class. During an extended discussion regarding Advisory Opinion 22 the concept of advocacy came up. Given Student X’s keen and consistent application of what seems logical I shouldn’t have been surprised to hear her take on advocacy relative to example of the lawyer who provides litigation support services (page A-71 line 272). His comment paraphrased was, “ I would imagine that if one were to gravitate toward advocating a client’s cause that would clash with the independence, impartiality and objectivity required when performing as an appraiser”. “Yes correct” I replied, “you cannot perform both roles at the same time, you must pick one”.
After Day 2 of the class there was an exam. As the room started to empty I noticed Student X, clearing out her belongings and leaving. “Good luck in your new career” I said. “How do you think you did?” I asked? She replied, “Ok I guess, I believe I answered most of them correctly except a few. On those that I was not sure of I just used some common sense”.
Policy prohibits me from revealing if Student X passed the exam. Regardless though, that’s not the point. Here is someone who has little practical experience in our industry. She took a few concepts that give some tenured appraisers a bit of trouble and she applied rational logic. Is all of USPAP that easy to get in its entirety? NO, definitely not. I don’t know what kind of appraiser Student X will be, but I like her approach using the “common sense approach” to problem solving.
In the words of Ben Franklin, “the problem with common sense is it is not so common”. Happy New Year.
…Both price indicators for the East End housing market show significant gains from the prior year quarter and prior quarter as more high-end properties were sold. In the fourth quarter there were 38 sales at or above $5,000,000, 58.3% more than 24 sales in the same period last year. The fourth quarter reflects the highest total since the onset of the credit crunch in 2008 and well above the 7 sale low point reached in the first quarter of 2009. The surge in high-end sales skewed the price indicators higher, but the housing market should still be characterized as stable. The median sales price for an East End property for the fourth quarter was $730,000, 4.1% above $701,161 in the prior year quarter and 16.8% above $625,000 in the prior quarter. Average sales price followed a similar, but more skewed pattern. The average sales price jumped 21.4% to $1,594,785 from $1,313,264 in the prior year quarter and increased 25.2% from $1,273,775 in the prior quarter…
…There were 4,252 sales in the fourth quarter, 28.4% below 5,935 in the prior year quarter and 2.1% below 4,343 in the prior quarter. The sharp decline from the same period last year was due primarily to the federal homebuyer tax credit in place in the second half of 2009. The intention of the program was to increase the number of sales for first time buyers in 2009. As a result, comparison with the prior year quarter was a period that saw the highest number of sales of the last four years. Despite the decrease in sales after the expiration of the expanded federal tax credit in April 2010, listing inventory fell 3.6% to 18,742 from 19,450 in the prior year quarter and fell 13.5% from 21,670 in the prior quarter. This prior quarter inventory drop was seasonal and consistent with the 7-year 14.6% average third to fourth quarter inventory decline over the same period…
Posted by Jonathan J. Miller -Thursday, January 27, 2011, 9:37 PM 2 Comments
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My friend, broker and blogger (in that order) Noah Rosenblatt over at Urbandigs is on a mission to share his analytics concepts via a free/pay subscription model. He kept me posted on its development over the past year and I gave a little feedback.
His day trading experience and approach to metrics on top of his real estate agent experience provide an interesting result. As he says, it’s still a work in progress, but hey, what isn’t? I subscribe – at $20/month, its worth it. You help him keep the lights on and it provides yet another way to look at the Manhattan housing market.
The chart above tracks pending sales activity fromt the REBNY feed with a series of rules to make the results coherent. Gotta appreciate someone who discloses their methodology. Few do.
All that talk about shortage of inventory at the end of 2010 by many in the brokerage community causing a more expensive market in the spring struck me as premature: tighter inventory serves as an offset to weak contract volume=general price stability.
The Pending Home Sales Index, a forward-looking indicator *, increased 2.0 percent to 93.7 based on contracts signed in December from a downwardly revised 91.9 in November. The index is 4.2 percent below the 97.8 mark in December 2009. The data reflects contracts and not closings, which normally occur with a lag time of one or two months.
note: pending sales are a current looking indicator because they are based on sales contracts, not forward looking.
The chart shows that the lines have been moving in opposite directions since the April 30th tax credit expiration. Media coverage on this report is always heavy and completely dependent on the headline of the release:
I’m not shilling gloom and doom here but pending sales actually fell 19.8% in actual numbers from November to December. To say pending home sales rose 2% seasonally adjusted is in my opinion, wildly misleading. As a provider of research, it is their responsibility to interpret and frame proper context or at a minimum talk about both results and explain why they are different. Avoiding transparency won’t somehow lead the market higher or build trust. In fact, I think most Realtors would rather see this information presented with more transparency and context.
PredictionWatch: Since I can’t find the NAR seasonal adjustment methodology disclosed anywhere, I have always assumed the seasonal adjustment was a 12-month adjustment to smooth out the seasonal variations. Good idea on paper but bad in practice. I predict the PHSI series will begin to refer to the non-seasonal results in the spring as the wild swing in last year’s sales go negative.
Posted by Jonathan J. Miller -Tuesday, January 25, 2011, 10:31 PM 1 Comment
Pimm Fox does a great job asking the right questions about the region. Glad I also got a chance to elaborate on the Case Shiller numbers released today.
Here’s the full story by Kathleen Howley who pulls together the interviews and Case Shiller report.
Posted by Jonathan J. Miller -Saturday, January 22, 2011, 12:01 AM 6 Comments
Last weekend there was a widely talked about article in the Sunday NYT called “Why Your Next Place May Cost More” that covered the recent plunge in building permits.
The experts quoted in the NYT article all seemed to exude an alarmist tone that prices were going to jump next year because no significant new product was being built but they completely disregarded product that has not been sold yet or the limited financing available to consumers to spur demand. In other words, permits dropped because demand is limited. Its not some sort of random event. If there was a shortage in a year as suggested by the experts, then permits would explode starting right now.
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Here’s the theme of the NYT piece.
“But starting in 2012, after most or all the new projects that were stalled or delayed have finally sold out, the supply of new apartments will take a decided dip, and prices for all apartments could start to rise significantly again.”
Here are a few of the quotes in the piece.
“We tend to go through these cycles where, when you finally come out of a recession, there’s a shortage of inventory,” said Gregory J. Heym, the chief economist for Halstead Property and Brown Harris Stevens. “You usually expect the slowdown to come over a couple years, but this was like slamming on the brakes. So to start up again may take awhile.”
Actually its just the opposite. For example, it took 7 years to unwind the inventory in the 1989 housing crash until 1996. Inventory was bloated in 1992 through 1995 – prices were soft and there was very limited new development. The recession ended 5 years earlier in 1991. After the 2001 recession inventory increased for another 2 years and only peaked because of the onset of the biggest global credit bubble in history.
Gary Barnett, the president of Extell Development and one of the few developers who continued building through the downturn, said the lack of inventory was more pronounced now than in previous recessions. “In the early 1990s,” he said, “there was a big overhang of things that had been built in the late ’80s, but when things stopped this time, it just fell off a cliff.”
The number of building permits “didn’t go from 10,000 to 6,000,” he added, “it went from 10,000 to nothing. So we don’t have the overhang and no big inventory to work through. That’s why the market recovered much more quickly than people expected.”
Not exactly. Permits fell below 500 in 1992 (373) and 1994 (428) after the 1990-1991 recession and didn’t return to “normal” levels for 5 more years.
However housing prices didn’t rise for another 8 years after the end of the 1990-91 recession.
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While I agree its a very dramatic drop in permits but permits don’t necessarily correlate with what gets built. I also don’t see us in this predicament forever. Actually the permit filing drop is the much needed visual for the credit crunch. Its not a sign of shortage, its a sign of surplus.
Why file an application for a building permit if commercial lenders aren’t financing new condo development in any meaningful numbers? Why? Because lenders see shadow inventory (they are holding it); they see high unemployment (even though NYC is improving); they see individual buyers unable to get financing in new development in large numbers to create the demand needed to absorb yet new condo construction. As I said before – if it were so obvious that prices would spike in 12 months and there would be a chronic housing shortage of new development, don’t you think permits would explode right now?
If commercial banks aren’t willing to lend now, and it takes at least 2.5 years to get a project online, even if current unemployment, shadow inventory and the ongoing credit crunch were ignored, then it would be 2014 before we see meaningful new construction volume.
Or am I using the wrong equation? Help me understand, please.
Barry is the only person I know who is described as providing “trenchant economic commentary” -(Norris/NYT) in fact, I’ve never even used “trenchant” in a sentence before now. Barry makes his 3rd visit to The Housing Helix podcast and he does not disappoint his fans for the depth of his insight.
This is an R-rated (“R” for “Ritholtz”) podcast – children, young adults, rating agencies and commercial bankers beware.
…There were 1,468 sales in the fourth
quarter, 29.9% below 2,093 sales in the prior year
quarter and 21.9% below 1,879 in the prior quarter.
While the decline in number of sales from the prior
quarter is a seasonal pattern, the decline is greater
than the 8.9% average of the prior five years. A
significant portion of the decline in number of
sales is attributable to the expiration of the federal
homebuyer tax credit, which incentivized more
sales activity in the first half of 2010, coming at the
expense of less sales activity in the second half of
2010. Listing inventory rose 14% to 6,203 in the
fourth quarter, from 5,439 in the prior year quarter
and 6.4% below 6,630 in the prior quarter. The drop
in sales caused inventory to rise and the monthly
absorption rate—the number of months to sell all
active inventory at the current pace of sales—to
edge higher. The absorption rate was 12.7 months
in the fourth quarter, weaker than 7.8 months in
the prior year quarter, but below the first quarter
2009 rate of 15.3 months, immediately following
the onset of the credit crunch at the end of 2008…
Had a fun interview with Tom and Sara this morning on the always MUST watch/listen Bloomberg Surveillance. We talked housing, rentals, vacancy and inventory. An added bonus was the addition of Adam Davidson – co-founder and co-host of Planet Money... Read More
