Matrix Blog

Rentals, Investing

Another Exchange Joins The Housing Index Party

April 6, 2006 | 12:01 am |

In Lanser’s column More indexes to bet on [OCR] he announces that there will be house-price indexes offered by the Chicago Board Options Exchange (CBOE) as an alternative to the Chicago Merc’s indexes that will begin trading on April 26th.

This index will be based on the NAR’s price benchmarks. Here are the details [CBOE]. I am a bit surprised that financial instruments would be based on stats provided by a trade group rather than an independent resource.

They are expected to offer a

  • national index

  • four regional indexes (northeast, south, midwest and west)

  • 10 metropolitan areas to be named.

This is a bit out of my domain but I don’t think this type of trading is a zero-sum game. Does anyone have thoughts on this topic?

Contrarian New Study Uses Word Bubble, Gets Attention, Misses Point

April 5, 2006 | 9:49 am | |

In the paper made available at the Brookings Institute Bubble, Bubble, Where’s the Housing Bubble [pdf] two economics professors make the argument that for the most part, there is no housing bubble. because the rental equivalent of the value is the true test.

This has been a very controversial paper which was covered very well by Damon Darlin last weekend in his article Some New Math on Homes [NYT].

Its been the approach taken by the Economist for the past 5 years and it always struck me as slightly out of sync with reality. I definitely understand the need to quantify the value of residential housing, to tie the market value to something other than perhaps, an inflated sale down the block. I understand this, I get it, I really do.

However, here’s my problem with the rental to value theory from a macro perspective:

In a residential housing market, this theory of income capitalization (converting the income stream of a property to value) is only plausible if the highest and best use of the property is a rental property. In fact, the income a property has the potential to throw off can determine what its future use would be. Class C office space in a fading central business district is converted to residential rentals, for example.

However, if you rest on this concept alone, then I would think every other house in a single family housing tract, for example, should be a rental. Yet this is not the case. Specifically, upscale single family neighborhoods rarely have rentals within their housing stock.

Why do developers of rental multi-family housing tend to build a smaller mix of apartment sizes within their developments than condos (there are always exceptions, of course). Because they are different markets. If they are different markets, then they would reflect different values. Rentals tenancy tends to be more transient and there is a wider pool of these potential customers. Developers build rentals over condos if the demand is there. Why? Because they are different markets.

In other words, this approach does not consider the fact that occupants of rentals and condos have a different bundle of rights – it doesn’t consider the additional use and enjoyment an owner has over a tenant. (Perceived future appreciation, freedom to do what you want to the property, freedom to configure the property into a 1-family or some other combination of units or tear it down). How does rental income take that into consideration?

Naysayers argue that the cap rates used to convert the income stream take this into consideration. Where does that data come from (reliably) when it is not the economic driver of the market to begin with?

In some markets, like New York, 2-4 family properties, which are turn of the century townhouses, have a premium placed on those configured as 1-family properties. 2-4 family properties are purchased to have the potential to convert to single family units. In fact, the income stream for such a 2-4 family property has not capitalized into a value that equals the sales price of the property as a 1-family for more than 20 years – through several real estate cycles.

The work is important, however, because it provides a contrarian way to look at the housing market and many noted economists have gone on record to say so. However, the premise of the report seems to be flawed IMHO, but definitely a good read.

_Other coverage_
Pomona profs: ‘No bubble!’ [OCR]
There Is No Bubble! (Unless You Live In San Mateo) [SocketSite]

Baby Boomers Hope To Get Away More Often

April 3, 2006 | 12:04 am |

In Kenneth Harney’s article Baby boomers fuel surge in second-home market [Columbus Dispatch] he discusses the 2nd home market phenomenon whose activity has more than doubled since 2001 reaching 881,000 purchases in 2004 alone.

When Congress amended the federal tax code in 1997 to permit as much as $500,000 (for married couples filing jointly) and $250,000 (for singles) of gain on the sale of a primary home to be spared from taxation, Chung said, “Homeowners did not have to buy expensive (replacement) homes anymore.”

Before 1997, the only way to avoid capital gains was to trade-up. Downsize an existing home and use the proceeds to buy a second home. Plus, baby boomers are in their peak earning years and will continue to drive this market for at least another decade.

However, in June Fletcher’s piece: Buyers Need to Choose Wisely When Purchasing a Vacation Home [REJ]

So, vacation-home buyers, take heed: The days when you could flip a beach house or ski place for fun and profit are probably over. That doesn’t mean that you should avoid a second home altogether, but it’s time to take a serious look at the economic factors that propel vacation markets, and to weigh the financial costs of ownership.

But as Vivian Marino writes in last Friday’s Water, Water Anywhere [NYT] second homes located near the water seem to be doing well.

Perhaps in the softer real estate climates these days, it really is all about location.

[Getting Graphic] Investors Take A Seat

March 28, 2006 | 1:48 pm |

Getting Graphic is a semi-sort-of-irregular collection of our favorite real estate-related images(s).

This photo was taken this past Sunday in Northern Virginia. Its a collection of lockboxes for investor units being flipped in a condo development. The balloons on specific lockboxes must be part of a well thought out marketing strategy.

Go to Bubble Meter to get the whole story.


What Do Cheddar Cheese, Nonfat Dry Milk and Housing Have In Common?

March 24, 2006 | 12:05 am | |

Besides the hot futures and options vehicles nearly every American trades such as cheddar cheese and nonfat dry milk (just kidding), starting March 31st, investors can now trade housing index futures as well.

The indexes will be called the S&P Case-Shiller Metro Area Home Price Indices and use calculation techniques developed by economics professors Karl Chase and Robert Shiller, author of the influential book “Irrational Exuberance.”

The press release provides a good overview: S&P Set to Launch Metro Area Home Price Indices.

There will be a composite index weight by market size and one for each of the following ten cities: Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York Commuter Index, San Diego, San Francisco and Washington D.C. I would venture a guess that the NY Commuter Index includes New York City, the outlying suburbs of Westchester and Fairfield Counties, Long Island and Northern New Jersey.

This index won’t render the OFHEO Housing Price Index or the various NAR indexes obsolete because this covers 10 metro markets rather than entire country.

However, it looks like the methodologies employed in this index are far better, with less bias than the NAR and OFHEO numbers. Here’s a series of white papers on the Chicago Merc’s site that sums it up nicely as follows:

_National Association of Realtor (NAR) Indexes_
– NAR indexes quoted as median home values and do not use repeat sales methodology
– Median values do not address homeowner returns and may readily be skewed if composition of housing stock changes, e.g., new luxury subdivisions are introduced to area

_Office of Federal Housing Enterprise Oversight (OFHEO)_
– Uses repeat sales methodology
– BUT … sample confined to Fannie & Freddie conforming mortgages and, therefore, skewed to low end of housing market
– Only perhaps 1/6th of California housing sold with conforming mortgages
– Uses appraisal data to supplement sample … appraisals tend to be upwardly biased?

What does a housing index that can be traded do for us?

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[Getting Graphic] Speculators Moving To Greener Pastures

March 20, 2006 | 12:01 am |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

Click here for full graphic [] and the associated article : Housing Speculators Relocate to Hotter Spots [LA Times]

Too much speculative activity from investors hoping to turn a quick profit is perhaps the biggest sign that a market — whether real estate or stocks or any other asset — is in an overpriced “bubble” condition, economists say. Too many speculators drive prices too high, and when they sense that the market is topping, they tend to sell all at once, sending prices into a free fall.



Rent vs. Buy Analysis Leaves Use And Enjoyment Out Of The Equation

September 25, 2005 | 9:15 pm | |


The New York Times this weekend released the results of an analysis of the costs and benefits of home ownership and renting, considering the tax benefits [NY Times]. It is a difficult topic to cover.

The article concludes that now may be a better time to rent than buy since prices are rising, rents are just beginning to rise and buyers place too much emphasis on the tax deduction.

We have to give credit to the New York Times Real Estate Section for publishing this analysis since they depend largely on advertising revenues from real estate brokers. Whether or not you agree with their analysis, it is refreshing to see this sort of thing.

One point of contention I have with articles like this is the concept of valuing the bundle of rights of ownership. This is left largely out of rent to value equation because it is so subjective. For example, the Economist magazine has been trying to call the collapse of the housing market for the past 4 years [Economist] using the spread between rents and sales prices as the predictor of housing price inflation but does not attempt to quantify home ownership within their analysis.

rentdue Nearly every article like this has an advantage of ownership as a feature such as the freedom to change the “color of their living room walls,” but its not quantified. It seems to me that the rent that a property is worth does not reflect all components of its value.

In other words, if a premium is placed on owner occupancy in a given market, then the value to the purchaser would be higher for an owner occupant than it is to an investor. For example, even during the darkest days of the recession in New York, the Manhattan townhouse market reflected a premium for single family houses over two to four family houses. The rental income of the units in the building did not justify the prices being paid for two to four family houses using the multipliers and overall cap rates used by investors at that time as buyers opted to convert these houses to single family.

Using rents as the only way to quantify use and enjoyment of a property paints an incomplete picture.

In addition, the rent versus buy decision should only apply on a case by case basis. It sort of like saying that nationally housing prices went up x% and then applying that amount to your property. The same goes for the opposite end of the spectrum. Rosy reports of rising prices do not always apply to all properties in the same manner.

Related Links
Housing: Buy or Rent [Angry Bear]
NYTimes: Is It Better to Buy or Rent? [Calculated Risk]