Of course the report is pointing out what has been an obvious problem for at least the past decade. Banks have transitioned into the view that an appraisal report is a commodity and not a professional consultation. The irony here is the same thinking applies across both commercial and residential valuation assignments for banks but with polar opposite results.
Commercial valuations are seen as “too high” and residential valuations are seen as “too low.” This probably has a lot to do with the fact that commercial real estate, especially class a office space in markets like NYC, Washington DC and San Francisco is probably in the middle of a bubble and there is clearly indirect pressure on the appraiser to make the deal work (no matter what is being said publicly).
Of course residential valuations were way too high during the housing boom so a similarity can be drawn during that period as lenders relied on mortgage brokers to deliver the majority (2/3) of loan volume by the time the market peaked.
The common thread in all this is to understand how the appraiser is engaged by the bank. In residential valuation it has morphed over to the appraisal management company process (B of A’s Landsafe is the poster child for bad appraisals) and in commercial valuation it has become a robotic automated engagement process:
John Cicero, a managing principal of the appraisal firm Miller Cicero, said: “It is a broken profession in a lot of ways. The appraisal industry has become commoditized, where lenders see appraisals as simply a commodity to be purchased by a vendor and where more emphasis is placed on the price of an appraisal than the expertise of the appraiser.”
For example, Mr. Cicero said, in the past lenders would often have long discussions about the project and the appraiser’s qualifications before hiring. Now, it is more common for lenders to use an online bidding system, where they issue a request for proposals from appraisers and often choose the least expensive. “They actually refer to us as vendors submitting a bid, not educated professionals who are providing an important service,” he said.
After a while (and it’s been a while) this becomes a self-fulfilling prophecy and the majority of appraisers used by banks are simply bad at their craft (taking liberties here) because the system attracts that “type” appraiser. As a result many of the good appraisers have either left the business or switched their client base to those who see valuations as more than the equivalent of a “title search.”
Banking’s shortsightedness illustrated
When a bank is considering lending $200M on a commercial office building, they are usually are more concerned about shaving $500 off the appraisal fee than they are contracting with a seasoned local market expert. [Commercial] high-ballers with fast turn times are thriving and their product is very weak. The same goes for a residential mortgage [low-ballers] only with commercial lending, the stakes are much higher because the exposure is so much greater – then ask yourself, who is the party that lacks competency? I’d say it’s systemic.
Posted by Jonathan J. Miller -Sunday, April 15, 2012, 8:09 PM Comments Off
I enjoyed Vivian Toy’s New York Times real estate cover story this weekend: Buyer Confidence: Portent or Blip? because it was full of optimism about the spring market. Who doesn’t like feel-good news? Admittedly I was a little rusty on what extactly “portent” meant:
something that foreshadows a coming event : omen, sign
I was the foil in the story:
Jonathan J. Miller, the president of the appraisal firm Miller Samuel, warned that buyer exuberance could be short-lived. With Wall Street bonuses much smaller than in years past, the surge in buying is not likely to last long, he said.
“Also, once we hit summer, we’re going to see a lot more distressed properties hitting the market,” he said. “Even though Manhattan is not a hotbed of foreclosure, the world around us will be, so there’ll be more negativity in the air.”
And I have a little theory on why there is a bit more buyer exuberance in the air that can be substantiated right at this moment:
1) The consumer was pummeled by a melee of bad economic news last fall causing them to press the pause button.
2) The Manhattan housing market was relatively quiet until mid-February despite the unusually warm winter.
3) The second half of the first quarter saw a release of pent-up demand.
4) Inventory has not seen much of a seasonal uptick this year (see chart at top of post)
We’re probably seeing some sort of temporary compression of market activity that feels like a boom. Demand kicked in late and those buyers are competing with those more in sync with seasonality. Mortgage rates remain crazy low and sellers have not been very confident about placing their homes on the market and getting their price. If we weren’t talking about Manhattan specifically, we’d also be worried about the rise in foreclosure activity now that the robo-signer servicer settlement between the 49 state attorneys general and the major mortgage servicers has been completed.
I am skeptical that current above average buyer confidence can be sustained past the spring market. Not being a wet blanket here, but I think it is way too early to break out the party plates. Everything tastes better in moderation.
I’m surprised the term hasn’t found its way into the dictionary yet, although Wikipedia has a comprehensive write up. I saw the Richard Meier designed buildings at 173-176 Perry Street (and later the sister building 165 Charles Street) in Manhattan as the first luxury development that fit my definition of the Starchitect phenomenon. It came online and sold quickly to west coast types who were awash in the aura of Meier’s phenomenal Getty museum achievement.
My take on the Starchitect phenomenon:
“The city is better for the starchitect phenomenon,” said Jonathan J. Miller, the president of the appraisal firm Miller Samuel, “because it enhanced the mystique of New York’s residential housing market. But during the frenzy, those buildings were marketed as if they had inherent greater value, and the jury is still out on that.”
I saw the evolution of events during the boom as going something like this:
Prices began to rise rapidly
New development surged
Land assemblage costs spiked
Developers looked for ways to differentiate (think pet spas)
High costs drove development skew to high end
Starchitects introduced to “create” value in emerging more affordable locations
Starchitect branding became the baseline for all new development
Branding morphed into designers and decorators
Housing market corrected
Starchitect buildings generally struggled as much as non-Starchitect developments
Being an appraiser, and thinking about values, I always looked at the Starchitect phenomenon as a way to artificially increase the net present value of the development – make it more front end loaded – i.e. create more buzz during the compressed marketing period pulling future upside to the developer rather than the buyer. Over time it all comes out in the wash and the branding power fades.
I see these projects as commanding higher prices than non-Starchitect developments built around the same period, but am skeptical they have a stronger staying power or more future upside.
Of course the Starchitect phenomenon moved on to commercial and global stages. I’d have to say that it was terrific for the NYC housing stock [Thank You Amanda Burden!] and will always have its place in the new development space. However the new development phenomenon that required nearly every building to have Starchitect branding was a one-off. It was over-emphasized and over-relied on, fed by an era of easy credit.
Its A Good Time To Be A Famous Architect, Even If You Are Not That Famous [Matrix]
Posted by Jonathan J. Miller -Thursday, February 23, 2012, 5:49 PM 1 Comment
In one of the greatest column names ever devised during the illustrious history of the New York Times known as “The Appraisal” [wink], Elizabeth Harris, pens “Amid a Subway Project’s Dust and Noise, No Complaints About the Rent” about the war zone that is Second Avenue on the Upper East Side of Manhattan. I was on vacation when this was published earlier this week and I was forbidden to bring my laptop.
I was approached to try to take a stab at measuring the impact of the Second Avenue subway construction on the local housing market. Listen to the blasting.
Sales transactions move too slowly to capture the neighborhood impact since this is a relatively recent event of the past few years. So I looked at rents since they are smaller and more nimble.
I divided a portion of the Upper East Side neighborhood into three zones (East 64th Street to East 96th Street) as follows:
The blocks to the east and west of Second Avenue (Third Avenue to First Avenue)
The blocks to the west of Third Avenue (to Fifth Avenue)
The blocks to the east of First Avenue (to East River)
I analyzed all the properties collected during our production of the The Elliman Report: Manhattan Rentals that actually rented in 2010 and 2011 and compared them. In a rental housing market that is seeing sharp gains in rents in the past year, I thought it would be interesting to see if there was a material difference in direction between the subway “zone” and everywhere else. I was only looking at “face” rents (the rent paid before deducting concessions) because I have more of that data.
And there was a difference.
In fact, the subway zone showed a 1.7% decline in median rent year-over-year, a 3.2% increase to the west and a 2% increase to the east. And the number of rentals in the subway zone increased 9% while the areas to the west and east fell 5.1% and increased 2% respectively over the same period suggesting that increased affordability may be attracting tenants.
Construction was supposed to be completed by 2016, but now it looks like 2018 or longer.
A gigundo transfer station…
…and trucks carrying explosives [Turn your head to left when viewing photo]…
While I was on vacation, I was contacted by Eyewitness News to discuss my numbers on camera but that wasn’t possible – although the online story includes no mention of the source of the results, the video did provide proper credit.
As time moves closer to completion some buyers may benefit from upside given how unpleasant some blocks are right now. The construction will likely provide downward pressure on housing prices in the near term but those along the zone will likely catch-up and perhaps even benefit from the transportation upgrade.
As a general rule, neighborhood property values tend to be higher in the west and lower in the east. It’s also possible that the price midpoint may shift further to the east than it is now once construction is completed.
Location specifics aside, additional subway access to and from the neighborhood should prove to be a tremendous asset to property owners in that area over the long run.
Gelinas demonstrates a lack of understanding with the Manhattan rental market, inconsistent with her long established writing credentials. She pontificates that the article was hyperbole and concludes the housing (rental) market has peaked because the New York Times said there was plenty of room to go:
If the Times thinks there’s no ceiling in sight, you can almost bet that the ceiling has already been reached. The paper of record has a track record on this. In 2005, the Times Sunday magazine ran a nearly 9,000-word story on the nation’s real-estate boom.
Well the rental market still has plenty of wiggle room if we are talking peak. We are currently 27% below the inflation adjusted rental peak reached at the end of 2006. In other words we are not in uncharted territory as a rental market.
The Manhattan sales market didn’t peak until mid-2008. And the reference to Bob Toll confuses the national housing market with Manhattan market. The national market peaked in mid-2006, 2 years before Manhattan did.
The rental market is up 9.5% year over year and continues to rise. Why? Because credit remains tight and likely will remain tight for the next several years driving many people to rent rather than purchase.
And then there is the issue of “froth”:
Toy further notes that “to compete for top rents, some landlords are undertaking expensive apartment renovations in older rental buildings. Even 10-year-old properties are being subjected to face-lifts.” That points to landlord worry, not complacency. You don’t plunk down tens of thousands of dollars in free cash flow to overhaul an apartment unless you’re nervous that newly built apartments are going to pose a threat. In a sizzling rental market, nobody insists on a washing machine or a hardwood floor.
This logic also shows a lack of understanding with the current dynamics of the market. The renovations are being done because the cost of renovations are far less than the resulting increase in achievable rent. There is a premium on upgraded space. You can see it in the market.
And the closing snipe is hypocritical since Ms. Gelinas is held to the same standard as Ms. Toy.
Neither Toy nor the Times editors did their job here—unless their job is to sell real-estate advertising.
My recommendation to Ms. Gelinas is to be more responsible with your platform and actually understand the issue you are writing about. I live and breath housing metrics every day and was offended by the inaccuracy and mischaracterization of your writing.
Posted by Jonathan J. Miller -Saturday, January 28, 2012, 1:55 PM 1 Comment
In the Sunday New York Times there is an interesting real estate cover story: So You’re Priced Out. Now What? that compares core neighborhoods with competing, less expensive alternatives. I provided the data fodder for the piece. Not always perfect apples to apples comparisons because neighborhoods in the boroughs are generally not homogenous, but clearly there is some linkage.
In analyzing real estate trends, I tend to think in terms of competition:
House versus house
Buyer versus seller
Buyer versus buyer
Seller versus seller
Bank versus bank
Brokerage versus brokerage
Agent versus agent
School district versus school district
Location versus location, etc.
And on the location aspect of value, I certainly think about prices in one neighborhood versus another (i.e. Soho vs. Tribeca, Upper East Side vs. Upper West Side) all day long (it’s how I make my living) but I look at them on a correlative basis not a competing basis – how one poaches or syphons off buyers from another.
I’m not exactly sure what it all means but I’m rethinking it.
Posted by Jonathan J. Miller -Friday, January 27, 2012, 10:25 AM Comments Off
I got a call from the New York Times recently in response to a Redfin study looking at the best time to list a house. Their conclusion seemed to be different than my experience in the NYC metro area, Washington, DC, Baltimore and Miami, all housing markets I have analyzed extensively so I dug deeper. I was inspired by the challenge and looked to Long Island for answers.
I think it really came down to the way Redfin used “winter” in the study since I came up with March as the best time to list using the extensive data over at the MLSLI (16,664 signed contracts from 12/10 to 11/11).
The Redfin report concluded that when you list in the Winter, you have less competition. However, you also have a lot less buyers so that benefit would be an offset by lower demand. This point is illustrated by the fact that the highest number of listings actually enter the market in March which is the month that results in the fastest marketing time.
When I drilled down to the day of the week, I caveated to the reporter (and was pointed out by the brokers in the article) that I think it really depends on the date of the broker tour day (the day brokers view new listings that came on the market). When I lived in Chicago, my town tour day was on a Friday and in my hometown in Connecticut, our broker tour day is on Tuesday. I would bet that Friday is a more common day for broker tours (to view all new listings that entered the market that week) which makes the findings somewhat contrarian since I would think Thursday would have been the best day to list (it was a close third best) because the property has time to get distributed before the tour day.
Of course this doesn’t suggest that a seller who decides they want to sell their home and it happens to be June, must wait until the following March.
Whatever the reasons or issues that are raised, we looked at over 16,000 contracts in a one year period marketed through the MLS of Long Island, excluding the Hamptons/North Fork. I was only measuring the time to market a property, not whether the highest price was achieved. I’ve got metrics on that but I want to crunch the numbers over a longer period to get more comfortable with them. I plan to do this in other markets I cover with MLS data.
Listing on a Wednesday, on average, results in the fastest marketing time.
Conclusion to the question: “When is the best time to list your property?”
On a Wednesday
These are mutually exclusive results but based on the data resulted in the fastest marketing time – days on market from original listing date to contract date.
…in reference a story about a triple-combination apartment and how all the sellers would likely benefit by allowing a buyer to return the apartment to its origination (or close to it’s) configuration. In combination sales, while the value of the total usually reaps a premium over the sum of the individual values, the resulting layout may turn out to be something less valuable as compared to an apartment similar in size that was originally designed that way.
When there is an opportunity to restore an apartment back to it’s original configuration before it was cut up (commonly during the housing shortage after WWII in Manhattan), the value of the apartment would likely be comparable to similar sized apartments originally designed to be single units.
Posted by Jonathan J. Miller -Wednesday, January 11, 2012, 6:00 AM 1 Comment
[click to expand]
Last fall Prudential Douglas Elliman turned 100 years old and they asked me to write an article for their Elliman magazine. If you’ve been living in a cave, I’ve been writing their housing market report series since 1994.
What started as a simple project morphed into a fun, albeit gigantic, research project. I learned a lot about the evolution of the Manhattan housing market, largely through the amazing incredible New York Times archives. This was right about the time of my web site revision and semi-necessary hiatus so I am cleaning out my desk of posts I have been itching to write so please indulge me.
The article I wrote for Douglas Elliman was beautifully presented by their marketing department and prominently inserted in their Elliman magazine (and iPad app!).
I have the feeling my project is going to morph into something bigger – it’s just too interesting (to me). A few things I learned about the Manhattan market over this period:
Douglas Elliman published the first market study in 1927 [heh, heh] not counting other marketing materials written before WWI)
Real estate media coverage in the first half of the century was social scene fodder (same as today) but with extensive and excessive personal details presented on tenants, buyers and sellers yet housing prices and rents were rarely presented in public.
Manhattan made a rapid transition from single family to luxury apartment rentals and eventually co-ops.
Housing prices and rents by mid century weren’t that much different than the beginning of the century.
Manhattan’s population peaked at 2.3M around WWI.
Wall Street in the 1920’s was seen as the driver of the real estate market.
Federal and state credit fixes in the late 1930’s help bail out the housing market.
• Change Is The Constant In A Century of New York City Real Estate – pdf [Miller Samuel]
• My Theory of Negative Milestones [Matrix]
The New York Times Real Estate section has been upgrading and tweaking the stats they provide on their listing database. The chart above shows the trend line for the number of listings seeing price reductions and increases. Increases remain nominal and constant while the number of listings with price decreases nearly doubles since the beginning of the year.
One thought I had is that more sellers thought prices were going to rise throughout the spring with the volume surge and set prices too high (a phenomenon I discussed in my 1Q 2010 report). When that strategy met resistance from buyers, a rising number of sellers capitulated and dropped their pricesresulting in a leveling off of sales activity in April.
I’m not quite ready to use the word “haunted” in my housing language, but I had a nice chat with Brian Sullivan and Mandy Drury of CNBC TV’s ‘Street Signs’ – 30 Rock is always quick walk from my office... Read More