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[FOMC Parse] Nowhere To Go, Although Badness Troughs

April 30, 2009 | 3:44 pm | |

The Federal Open Market Committee cut the federal funds rate another 25 basis points to 2%. The WSJ breaks out the announcment FOMC statement in a feature called Parsing The Fed.

Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing.

With talk of green shoots and everyone digging hard to find silver linings, the Fed announcement was consistent with other news as of late. In other words:

Things are getting worse but not as fast as before.

I’ll take that.

GDP was -6.1% however consumer consumption is up since January which suggests this may be the trough of its decline. The recent Case Shiller index results brought similar comments about housing, that the worst may be over but demand and prices are still falling and have more to go.


[Selling MOM Out] Month Over Month, ‘Cause It Looks Better

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 Agency’s monthly House Price Index. December’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 – including single-family, townhomes, condominiums and co-ops – 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.

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[Solid Puff Piece] Goldman Research Note Clouds Manhattan

January 13, 2009 | 1:43 am | |

On Thursday there was a widely viewed and discussed research letter by Goldman Sachs covering the Manhattan housing market. Lockhart Steele at Curbed first reported it on Thursday, followed by the WSJ on Friday.

I thought Lock broke it down thoroughly — Curbed style — and there was nothing more to it. Later, I got about a bunch of emails asking for my thoughts on the research note so I thought I would take another look (since my work is part of their commentary).

I placed the full text of their research note at the bottom of this post.

Frankly, I thought the Goldman research letter was surprisingly thin, with weak logic and a bit self-serving since Goldman was the first licensee of the S&P/Case-Shiller Home Price Indices.

Some of my observations about their observations:

  • Goldman predicts housing prices will drop a total of 35% to 44% to late 1990’s levels. (Since prices have already fallen 20%, that means we are halfway there.)
  • Goldman uses the phrase “these types of arguments are difficult to quantify and are often heard just prior to a real estate market downturn” twice in this paper. Gotta love boilerplate!
  • Goldman refers to me as an analyst (dammit Jim, I’m an appraiser not an analyst! a la “Bones” on Star Trek) as in “one analyst estimated that the prices of apartments that were under contract but had not yet closed fell by 20% from August to December.”
  • Goldman criticizes the “brokerage reports” for not considering price per square foot since the firms publish mean and median prices for both co-ops and condos on a quarterly basis, but these are difficult to interpret due to significant changes over time in the size and quality of apartments being sold. Of course the report I prepare as well as my competitors’ reports all use price per square foot as a basic price metric. I was the first to do this many years ago for the co-op market.
  • Goldman alludes to one of the research companies cited as having only one year of price per square foot data. Of course Goldman forgot to mention our reports contain price per square foot data going back to 1989 broken out quarterly and annually by number of bedrooms (size) and property type (co-op, condo and 1-5 family).
  • Goldman relies on only matched price observations involving successive transactions in the same condominium for estimating the overall change in prices. This is actually a logical point. Since about 38.3% (in 4Q08) of condo sales were from new developments, using them as a basis of establishing a trend would reflect market conditions 12-18 months ago when the typical contract was signed. Any report or index that does not extract new development from the condo sales data can be as much as 12-18 months behind the market. I have found re-sale activity to be more reliable for establishing condo price trends which is something that can be captured using the CSI repeat sales methodology, despite many reservations that I have.
  • CSI continues to omit co-ops from its product suite, which represents about 75% of the housing stock in Manhattan. Which begs the question: “How do you track a housing market without 75% of the housing stock considered?”
  • Goldman uses the CSI index (which covers all of New York City, not the individual boroughs) yet analyzes income in Manhattan to establish ratios for affordability. This is perplexing to me since prices in the outer boroughs are half their equivalent in Manhattan. With the way this part was written, I get the feeling that using the CSI index was simply easier to plug into their ratios.

In short, I see this research note is more of a “puff piece” using the “faith and credit” of Goldman’s brand to hump the new Case Shiller condo index which was why I didn’t pay much attention to the Goldman report when initially released. I understand it is not a white paper, nor was it meant to be backed up by lots of footnotes and appendices. However, the fact that it was released by the gold standard of (former) investment banks, is a bit disappointing.

Here it the research note text:

We use the recently introduced S&P/Case-Shiller index for condominium prices to assess the valuation of the New York apartment market. Although housing market valuation typically has little predictive value for the near term, it is useful for anticipating longer-term moves, especially when prices are far away from equilibrium.

Indeed, New York apartment prices are very high relative to the observable fundamentals. Using three alternative yardsticks—price/rent, price/income, and affordability —we find that prices would need to decline by 35%-44% to return to the valuation levels seen in the 1995-1999 period, before the start of the recent boom.

The uncertainty is substantial. On the one hand, the picture would worsen further if per-capita incomes in Manhattan returned from their current level of 3 times the national norm toward the pre-1990s average of 2 times the national norm. On the other hand, it would brighten somewhat if jumbo mortgage rates converged toward conforming rates, perhaps because of a broadening of the Fed’s support measures. In addition, societal and demographic changes could also help, though these types of arguments are difficult to quantify and are often heard just prior to a real estate market downturn.

Following a decade-long boom, activity in the New York City apartment market is now slowing sharply. The sales reports for the fourth quarter of 2008 released on Monday by two of the largest New York real estate brokers—the Corcoran Group and Prudential Douglas Elliman—suggest that sales dropped by 25%-30% from the fourth quarter of 2007 (see “Striking Declines Seen in Manhattan Real Estate Market,” New York Times, January 6, 2009, page A20). Although the prices of closed sales were little changed from a year earlier, one analyst estimated that the prices of apartments that were under contract but had not yet closed fell by 20% from August to December. Moreover, it is well known that prices lag sales activity in the housing market, so most observers agree that both contract and closing prices are likely to decline in the near term.

Information on sales and price momentum is very helpful for predicting near-term moves in the real estate market. But in order to gauge the longer-term outlook, it is better to look at fundamental valuation indicators, such as the level of prices relative to rents or incomes, either directly or adjusted by mortgage interest rates. These types of variables don’t have much predictive power over the near term, but they start to become much more powerful at horizons longer than 1-2 years.

Until recently a fundamental analysis of the New York apartment market was hampered by the lack of high-quality price data. The various brokerage firms publish mean and median prices for both co-ops and condos on a quarterly basis, but these are difficult to interpret due to significant changes over time in the size and quality of apartments being sold. In addition, research firm Radar Logic, Inc., publishes a “price per square foot” series for the New York condo market. However, there is only a year’s worth of history, and changes in the average quality of homes sold can still distort the data even though the Radar Logic approach does control for variations in size.

But the data situation has improved dramatically with the recent broadening of the S&P/Case-Shiller (CS) repeat sales home price index to cover five of the nation’s largest condominium markets, including New York. These indexes stretch back to 1995—not as far as we would like but much better than what is available currently—and they adjust for changes in both size and quality of the condos by using only matched price observations involving successive transactions in the same condominium for estimating the overall change in prices.

Admittedly, a repeat sales index does not perfectly adjust for quality changes. In theory, the bias could work in either direction. On the one hand, wear and tear will reduce the value of a given condominium over time if the owner does not look after the property well. On the other hand, upgrades such as new flooring or a nicer kitchen may raise the value. While the CS index seeks to eliminate the influence of these factors by downweighting price change observations that are far out of line with local comparables, this is unlikely to eliminate all sources of bias. Still, we believe that a repeat sales index is far superior to the available alternatives for the purpose of measures changes in underlying real estate prices.

In analyzing the data, it is useful to look first at the raw numbers for New York condo prices. As shown in the table below, nominal prices tripled from 1995 to 2006, went essentially sideways in 2007, and have declined by about 3% in 2008. The stability since 2005 is somewhat at odds with reports from the New York real estate brokers that still show meaningful gains in mean and median prices over this period. However, we suspect that the apparent contrast is resolved by a shift in transactions toward larger and higher-quality apartments over this period, which would increase the mean and median price figures but leave the CS index unaffected.


(Jan 2000=100)

Oct-95 75.3

Oct-96 75.4

Oct-97 80.6

Oct-98 89.2

Oct-99 97.5

Oct-00 111.3

Oct-01 126.7

Oct-02 144.3

Oct-03 161.2

Oct-04 188.8

Oct-05 222.6

Oct-06 227.4

Oct-07 226.7

Oct-08 221.1

Source: Standard and Poor’s.

But are the price gains sustainable? To assess this, we focus on three primary valuation measures:

  1. Price/rent ratio. We divide the CS index by the Bureau of Labor Statistics’ index of owners’ equivalent rent for the New York metropolitan area, and index the resulting ratio to 100 for the average of the 1995-1999 period. We choose this base period because it mostly precedes the recent boom but covers a period when the quality of life in Manhattan had already improved significantly from the 1980s and early 1990s. Hence, a return to the average 1995-1999 valuation level might seem like a fairly neutral assumption.

  2. Price/income ratio. We divide the CS index by the Bureau of Economic Analysis’ measure of personal income per capita, and again index the resulting ratio to 100 for 1995-1999. Although the condo price index covers the entire New York metro area, we use an income series for the County of New York (i.e., Manhattan) rather than the entire metro area. The New York condo market is quite concentrated in Manhattan; this concentration is particularly pronounced in the CS index because it is weighted by value rather than units and therefore typically assigns a much greater weight to condo sales on Fifth Avenue than in Queens. (Note that New York County income is only available through 2006; we somewhat optimistically assume that it has grown at the average national rate since then.)

  3. Affordability. Using a standard mortgage calculator and assuming both a jumbo mortgage and a 30-year maturity, we calculate (an index of) the share of Manhattan per-capita income spent on condo mortgage payments at the current level of the CS index and the current level of jumbo mortgage rates. We again index the resulting ratio to 100 for 1995-1999.

The table below shows what all three of our indicators say about the current valuation level, as of October 2008. We focus on the percentage decline in nominal condo prices that would be required to bring our three valuation measures back to the 1995-1999 average, assuming no changes in other inputs such as rents, incomes, and mortgage rates.

Price/Rent Price/Income Affordability

Required Decline* -44% -37% -35%

*In order to return to 1995-1999 valuation levels.

Source: Our calculations. See text for additional explanations.

Our indicators suggest that New York condo prices would need to fall by between 35% and 44% to return to a neutral valuation level, depending on the valuation measure we choose. Under the (admittedly unrealistic) assumption that prices decline by the same percentage in each market segment, this type of drop would imply that a 1-bedroom condo whose price currently averages roughly $800,000 would decline to $480,000; a 2-bedroom condo would decline from $1.7 million to $1 million; and a 3-bedroom condo would decline from $3 million to $1.8 million. (All these figures are approximate and are loosely based on the brokerage firms’ fourth-quarter reports.)

Since economies typically grow over time, one would normally hesitate to predict that “mean reversion” in a price/income or price/rent ratio should occur entirely via a decline in prices rather than an increase in incomes or rents. In our case, however, the assumption of flat nominal incomes and rents does not seem excessively pessimistic. In fact, it is quite possible that nominal Manhattan incomes will decline for a while. Such a nominal decline would be extremely unusual at the national level but did occur in Manhattan following the 2001 recession, which was much less severe than the downturn we are currently seeing.

In fact, it is instructive to consider the potential implications of a return of relative Manhattan incomes toward the national norm prevailing before the Wall Street boom of the past two decades, either because of pay cuts in the financial industry or because of a possible out-migration of affluent individuals. From 1969 to 1986, Manhattan per-capita income averaged 2 times the national average, with no clear trend. Over the next two decades, however, it grew to 3 times the national average. If incomes fell back to the pre-1986 level of 2 times the national average—and if national per capita income remained unchanged—prices would need to fall as much as 58% to return to the 1995-1999 price/income ratio. (The 58% drop is calculated as the 37% drop shown in the table assuming constant income, plus the 33% drop in per capita incomes, minus a term for negative compounding.)

So is there any hope for the New York apartment market? Apart from a dramatic turnaround in the city’s economic fortunes, the most plausible story is a drop in jumbo mortgage rates. So far, jumbo rates have not benefited much from the recent decline in mortgage rates, but this could change if the Fed (presumably in conjunction with the Treasury) decided in the course of 2009 to broaden its support from the conforming market to the private-label mortgage market. To make an extreme assumption, if the jumbo mortgage rate fell from the current 7% to 5%, this would reduce the “required” price decline from 35% to 19%. Of course, this assumes that affordability is the only measure that matters for home prices and there is no role for the “raw” price/rent or price/income ratio, and that Manhattan incomes stay at 3 times the national average.

In addition, it could be that societal and demographic changes will keep New York apartment valuations above the levels that prevailed in earlier periods. For example, one might argue that the memory of high crime rates was still fresh enough in 1995-1999 to make this period an excessively pessimistic benchmark. If crime stays low during the current economic downturn, perhaps Manhattan real estate will retain its higher valuation in coming years. Alternatively, one might argue that the aging of the baby boomers will continue to support the New York market as “empty nesters” want to live closer to the city’s attractions. These types of arguments are difficult to quantify and are often heard just prior to the start of a real estate downturn, but they do underscore that our analysis of the observable data on prices, rents, incomes, and interest rates only provides a very partial view of the New York apartment market.

Source: Goldman Sachs

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[Bullish In Technicolor] Housing Prices Show More Weakness

August 26, 2008 | 11:38 am | |

It’s 48 hours of market report nirvana!

Guess what?

  1. Home prices are falling. [shocking]

  2. And prices during the spring market didn’t fall as much as the winter. [informative]

This is all very new and helpful. [sarcasm]

Here’s a recap

Here’s a thought. Mortgages are more expensive and less accessible than two years ago. Until that changes, I wouldn’t expect real, measured improvement. Improvement will come eventually. Let’s deal with the situation at hand rather than all the focus of calling the turnaround correctly.

What especially drives me crazy has been the viewpoint that things are getting better based on rising activity and/or prices in the spring in certain markets. It’s called “seasonality.”

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[Smoking Gun Crack] Signs Of Housing Recovery

July 14, 2008 | 10:15 pm | |

In a lapse of judgement, poor writing or an irrational need to be contrarian, the normally solid publication Barrons (I subscribe) drops the ball on their cover story:

Bottom’s Up: This Real-Estate Rout May Be Short-Lived

If IndyMac, Fannie and Freddie didn’t steal the headlines over the weekend, I wonder if this article would ever made it to print.

The article suggests housing is moving toward recovery based on a review of recent data:

  1. NAR exisitng homes have a 10.8 month supply in May versus a 11.2 month supply in April (ahem: Seasonality occurs in rising and falling market. Home sales rise in the spring.)

  2. Case Shiller showed prices rose in 8 of 20 housing markets in April, and the pace of decline is slowing in many of the cities surveyed. (see no. 1)

  3. Treasury Secretary Paulson recently said: “”we are well into the adjustment process.” (This is a political move to allay investors – other than that, what does this statement actually mean?)

  4. David Blitzer, chairman of the S&P Index Committee indicated the media was only interested in the “…bad year-over-year number.” (blame the media observation – see no. 1.)

  5. Pending Congressional bailout. FHA will reposition $300M in subprime mortgages. (For perspective, Fannie and Freddie have 5 trillion in outstanding mortgages, how does this save the market? It’s a drop in the bucket).

  6. Fannie and Freddie may be taken over by the government is a good thing. (no it’s not)

  7. A million unit drop in housing starts has signified the end of the last 3 housing corrections. (none of those period saw anything close to the speculation and poor lending practices seen the recent boom – no lessons learned by history here).

  8. Affordability (via price/income) has improved with price declines. (The rationalization for increased affordability is pretty silly since underwriting standards are much tighter. In other words, if your credit score and salary didn’t change from last year, and your home dropped in value, your buying power is probably much lower. In other words, affordability did not increase despite the mechanical calculations to the contrary).

  9. NAR reports 2% increase in co-op. condo and townhouses from April to May. (See no. 1)

  10. NAR economist Lawrence Yun is actually relied on in this article. (He called the credit crunch temporary last August and the housing market would return to normal in the fall.)

  11. Mortgage market weakness is front end loaded with foreclosures and defaults. (In theory the bad is behind us – for the life of me, I can’t understand the rationale. How does this mean housing is poised for a turn if the scope of the credit crunch is unprecedented?)

Good grief.

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Curvilinear MPG With Benefits, While Confidence, CSI and OFHEO Meet Expectations

June 24, 2008 | 11:08 am | |

…and those expectations are continued weakness.

The focus on oil and fuel efficiency of cars seems to be taking over the BBQ conversation from housing these days.

the relationship between consumption and m.p.g. is curvilinear, and there is a greater savings at lower m.p.g.’s. Over 10,000 miles, the 28 m.p.g. car uses 198 fewer gallons than the 18 m.p.g., more than double the savings of the 50 m.p.g. car compared with the 34 m.p.g. one.

With this new measure, the researchers suggest, consumers would more easily see the value of swapping an inefficient car for one that is even just modestly more efficient.

Speaking of curvilinear relationships, check out this recent ad in Craigslist. A friend of mine is having great difficultly finding an apartment. Apparently this landlord has the answer.

Today is just full of fun announcements…

Isn’t it summer Being outside, enjoying the sunshine? Optimism? Consumer Confidence plunged to a 16-year low in May.

As expected, the S&P/Case Shiller Index showed continued decline in April, the beginning of the “spring market” when sales activity is most robust. In fact, it showed a record decline for its 20 year history. I think there was hope brewing that the housing market is approaching bottom. It’s hard to see that with a 15.3% annualized decline and a 17.8% decline from peak.

Of course, OFHEO released their numbers today as well and guess what? OFHEO shows the housing market is declining 4.5% annually (over the same period that Case Shiller measures). That’s because CSI includes the entire price spectrum and OFHEO excludes non-conforming mortgage sales. It is interesting how much the data gets skewed by the high end market. Based on the difference between these two indexes, the high end is tanking (no pun intended).

Tomorrow, the FOMC announcement is on tap. The futures markets are betting on no change in rates. I would think further rate cuts will hurt the economy by empowering inflation. Rate cuts in the past year have not helped housing in any measurable, even curvilinear way.

At least not enough to get pumped up about (sorry).

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Confidence Has Left The Building

March 26, 2008 | 1:14 pm | |

Guess what? People don’t feel as good with their lot in life when the value of their house falls. What a concept. Professor Shiller wrote a position paper on the Wealth Effect which tied the power of consumer spending more closely to housing than stocks.

The Conference Board released their index and it has reached the level seen only during recessions. It is at its lowest level since 1973. Incidentally, I remember walking to school in 1973 (I wasn’t old enough to drive or shave) seeing long lines at the pump and the conventional wisdom said there was only 20 years remaining for oil.

The S&P/Case Shiller Index has only one market area showing positive price growth yoy (New Yorkers: remember that CSI excludes condos from it’s metro price calcs) – Charlotte, NC and the declines across their other 19 markets are growing and some are approaching 20%. My former firm Radar Logic will be releasing their monthly report next week and I expect it to say show something similar.

OFHEO, which is scrambling to remain relevant, has converted to monthly releases to compete with the CSI index. OFHEO shows prices for January were off 3% from a year earlier. OFHEO uses a similar methodology to CSI but only tracks conforming mortgages. The current threshold is $417,000, which severely underrepresents certain higher priced housing markets on the east and west coasts. I’ll have to look into how OFHEO is going to track housing stats after September 1 when the temporary conforming mortgage loan limits increases to a max of $729K. Also, it is important to only look at their purchase index since they, for some unexplainable reason, include refinance market value estimates in their data as well. We now know that appraised values during the housing boom were systemically inflated.

Of course this negative news is offset by the NAR press release (which is patently misleading) covering existing home sales:

One bright spot is that falling home prices may be beginning to spark buyers’ interest. The National Association of Realtors said earlier this week that sales of existing homes rose in February.


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[Rank Forecasts] Rankled By Rankings, Prognostication At Its Finest

March 24, 2008 | 12:41 pm | |

I linked to a story about forecasters a few days ago but it’s still got me confused.

These days, housing prognostication is big business (I do a little prognosticatin’ myself). There are a few people that I watch closely and in fact, several that I fawn (is that a word?) over. But I was taken aback by the USAToday/Atlanta Fed’s rankings of the most accurate forecasters out of a pool of often quoted economists.

It was done anonomously so the analysts would not be swayed by personalities they were covering:

Atlanta Fed economist Tao Zha and Fed programmer Eric Wang analyzed the quarterly predictions to determine the most accurate forecasters. Zha and economists Robert Eisenbeis and Dan Waggoner had previously developed the methodology. Rather than assessing the accuracy of each forecast variable separately, as is commonly done, the economists used statistical methods to assess the joint accuracy of the predictions. The Atlanta Fed economists did not know the identities of those they were evaluating.

David Berson, formerly of Fannie Mae and now of PMI, has long been one of my favorites, as well as Mark Zandi of Nariman Behravesh of Global Insight and Ethan Harris of Lehman are on the list and I enjoy reading their work. The remainder on the list I am not familiar with.

However, several prominent economists were not ranked, and I am not sure what that implies:

David Rosenberg of Merrill Lynch, a bear, pumps out a lot of interesting work and I enjoy hearing him speak often on Bloomberg.

Robert Shiller, perhaps the most widely quoted economist out there, was not on the list. He is the author of a best selling book and co-creator of the Case Shiller Index.

Nouriel Roubini, an often quoted economist for bloggers and the media, is perhaps the most negative forecaster out there, yet he is a terrific public speaker (just make sure you are euphoric before you hear him speak).

What caught my attention was the inclusion of Lawrence Yun of NAR as the 5th most accurate forecaster. I found that shocking, actually. I am sure he is a nice person and works very hard, but he has made some of the most amazing comments about the state of the housing market each month that have nothing to do with the data that is released. Perhaps that’s the problem. It’s not the data (that was analyzed) it’s the delivery of the message.

Here’s an example.

Today, NAR’s Existing Home Sales stats were released:

Sales of existing homes increased in February and remain within a fairly stable range, according to the National Association of Realtors®.

Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 2.9 percent to a seasonally adjusted annual rate (1) of 5.03 million units in February from a pace of 4.89 million in January, but remain 23.8 percent below the 6.60 million-unit level in February 2007. The sales pace has been in a fairly narrow range since last September.

Here are NAR’s hard numbers.

Lawrence Yun, NAR chief economist, said the gain is encouraging. “We’re not expecting a notable gain in existing-home sales until the second half of this year, but the improvement is another sign that the market is stabilizing,” he said.

How can you issue a press releasing relying on the change between January to February to be a sign that the market is improving?

Sales are generally slowest in January. The change in sales from the prior February was down 23.8% and prices over the same period are down 8.2% yet the headline says the market is stabilizing?

Please tell me what the basis is for that headline in the facts that were presented or any external changes in the mortgage/credit markets and the economy? Am I missing something here?

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A New York Story: Pop Goes The Country

September 18, 2007 | 10:11 am | | Public |

The bi-annual real estate issue of New York Magazine had been talking about a crash since 2003. However this year, they apply a more reasonable discussion to the burning question: Why is New York different and how long will it last? (since their new owners took over a few years ago, editorial content has returned the magazine to “must-read status”).

Aside: Of course I love the fact that the average sales price for Manhattan 2Q 2007 presented in the Prudential Douglas Elliman Manhattan Market Overview that my firm authors of $1,333,316 is on the cover (something about loving numbers).

While I am not in total agreement with all the content, it is a refreshing approach because the article tries to present both sides in a best and worst case scenario format. The take away is weighted toward the pessimistic view.

There is discussion of

Hyman Minsky’s ingenious model of asset bubbles, economic stability breeds riskier and riskier investors: First come the “hedge borrowers,” who play with their own money; they are followed by “speculative borrowers,” who have enough cash flow to keep the lender at bay but not enough to cover the principal investment, and finally “Ponzi borrowers,” who are, as the name suggests, borrowing to refinance other debts they can’t meet, in the wild hope that the market will keep climbing.

Of course, New York had very little speculation during the New York housing boom so this applies more to borrowing habits of market participants.

The article references economists I admire and have quoted in the past: Joseph Gyourko, Christopher Mayer, Todd Sinai, Edward Glaeser, Robert Shiller and Nouriel Roubini (whenever I am feeling too optimistic) plus several others. Brad Inman coins the phrase: “Irish Effect.” They also included my friend Noah Rosenblatt, who runs and is someone I recently discussed the housing market for hours after midnight on the tarmac of Atlantic City’s airport on a grounded jetBlue flight from the recent San Francisco Inman conference (how cool is that?).

Worst Case: In this scenario, a full-fledged credit crunch rips through the system. The August employment figures, showing no growth for the first time in four years, are the beginning of a serious downward trend. The economy heads for a hard landing, and an all-out recession ensues.

Best Case: In this instance, the current liquidity problem is contained by the end of the year. Employment figures pick up in September. Global growth continues.

A correction to the article is needed: The widely quoted Case Shiller Index doesn’t include co-op and condo sales as indicated in the article, which is 96.9% of the Manhattan sales market, nor does it include new development and foreclosures.

This just in: Lehman’s net declines, but less than analysts expectations.

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[Getting Graphic] Getting Real Nominal On US Housing

August 27, 2007 | 12:01 am | |

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

David Leonhardt of the New York Times, does a very cool breakdown of the Nation’s housing markets, to prove incorrect the mainstay argument that housing prices, based on OFHEO numbers (the official government stats), have not shown an annual decline since their inception in 1950. Because OFHEO excludes all transactions with non-conforming mortgages (currently over $417,000), a large swath of data is excluded, especially in the coastal cities where housing prices are higher.

It should be pointed out that OFHEO also includes the appraised value of refinance transactions, which can be the majority of the sales data captured by Fannie Mae and Freddie Mac in a certain period of time.

He instead relies on the numbers provided by Case Shiller which do not exclude non-conforming loans like OFEHO does (however, Case Shiller does exclude new construction, condos and foreclosures, which have been key components of the housing market boom of the past 5 years).

David does a wonderful job at explaining the methodology in the video and the interactive graphics are amazing. He emphasizes using inflation in the presentation of housing prices.

Click here for interactive graphic and short video on the US housing market.


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[List-o-links] At The Golden Gate: I Left My Heart In New York

December 4, 2006 | 11:35 am | |

For the next two days, my posts will be a bit sporadic. I am in San Francisco for business. Its one of my favorite places. The weather is perfect but I am desperately trying to stay on New York time. Its hard to get up at 3:30 am PST, no matter how you try to convince yourself.

Here’s a few links that may be of interest.

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December 2, 2016

Playing “Chicken” With The Housing Market

After my trip to China two weeks ago and last week’s cop-out Happy-Thanksgiving-without-any-content Housing Note, I needed to double down and return to the working world, providing information, insight and of course, transitioning from turkey to chicken (despite the shortage of chicken data). And be sure to use quotes for maximum effect.

Another reason inventory rises and falls

One of my go to sources of housing insight is John Wake, former (International Agricultural Trade) economist and now real estate agent. He always has a great way of conveying information.

In this video he speaks about how rapidly rising home prices cause consumers to delay placing their homes on the market. We can see this in Manhattan’s market from the 2013 bottom through 2015. Finally in 2016, the expectation set in that home prices weren’t going to rise as much and sellers began to think this was a time to cash out. Manhattan re-sale inventory is upon sharply in 2016.


And John Wake’s explainer video:

Matrix Blog Has Been Jump Started

Since I began this weekly Housing Note newsletter nearly two years ago, it’s been a labor of love and I let my Matrix Blog suffer. I don’t know whether it’s the holiday spirit but I started to put more love back into it with more regular blogging in recent weeks. If you’re interested, you can get posts through RSS, have them emailed to you or get them through my twitter feed.

Here are some recent posts on Matrix

No 7-Year itch: A few more thoughts on the China housing market

After returning from China a few weeks ago, I’ve had some time to reflect on their housing market, which is perceived to be a massive bubble. I wrote about the phenomenon of limited re-sale activity there. It is a buyer orientated market with holding periods expected to be across multiple generations. In the U.S. it is commonly held that the average length of stay of a home owner/occupant is 7 years. I think it’s more like a decade or more given the persistence of tight credit conditions and only recent signs of wage and household formation growth. In China, housing turnover seems nominal.

In other cities, we see similar levels of relatively low real estate market liquidity. 2016 projections, estimate Shanghai unit turnover at under 2.7%, Tianjin at 3.4%, and Xiamen at 2%. This would equal cyclical turn over rates of 37.6, 29.6, and 50.3 years.

And consider the proliferation of divorce fraud in China. Buyers will readily get a divorce to skirt the 1 investor home purchase rule per household and then remarry afterwards (I’d be too worried my wife wouldn’t remarry me). But the government is cracking down on divorce fraud and applied some significant mortgage restrictions to reign in the bubble (like requiring 70% down).

From the WSJ – Average home prices in Shanghai, shown, were up 27.5% in October from a year earlier, outpacing the 18.2% price increase across 100 Chinese cities.

Here is a photo I took on a high speed bullet train between Beijing and Shanghai. For much of the 5.5 hour ride, there were new buildings constructed on both sides of the tracks.

[click to expand]

Mortgage Rates Have Been Rising

While mortgage rates have been rising since the election, that doesn’t mean housing prices will fall. The fact that rates are rising (I am skeptical that there is a lot more of that coming), means that the economy is perceived as improving. The hope is that there will be a “soft handoff” from a low rate to higher wage growth.


A modest rise in mortgage rates will go a long way towards normalizing credit conditions which then widens the foot print of those who can take advantage of low mortgage rates. Ever wonder why mortgage volume has been sliding along with rates?

What Happens if Young People Never Buy Homes?

I came across this discussion in Vice Canada (wait, is there really any “vice” in Canada?) – what would happen if millennials simply stopped buying houses. It’s an intriguing question since the homeownership rate may have stopped falling after non-stop hand wringing about it since the financial crisis – that we are moving to a rental society. I believe the key driver of the shift was tight credit conditions.


“Aspiration Pricing” Transitions to “Offensively Overpriced”

If you’ve been a regular reader of these Housing Notes you know I have long tried to get into the urban dictionary with new housing phrases like “high plateau” and “aspirational pricing.” The latter refers to the lack of shame of home sellers who list their homes for impossibly high numbers and don’t ever seem to sell. In this great read on the phenomenon now as re-sale inventory is rising. This Bloomberg article is chock full of good quotes and a good chart: Manhattan Homeowners Are Looking for 40% Returns—In Just Five Years

Sellers tend to be later than buyers to the new market condition (duh).

“In my experience, it takes sellers a good one to two and a half years to believe in the new market,” Miller said. “The buyers are with the program immediately.”
…said Rachel Altschuler, a broker with Douglas Elliman. “Of course, every seller thinks theirs is the most most unique, amazing property on the market, so you have to be prepared to say the things they don’t want to hear.”
“There’s a conversation to be had between buyer and seller — as long as you’re not offensively overpriced,” said Scott Harris, a broker with Brown Harris Stevens.

And re-sale inventory is rising which leaves those offensively overpriced (LOVE THAT PHRASE) listings dangling in the wind. Current buyers remain too nice and won’t make an offer on listings that are wildly overpriced. With more inventory to choose from buyers simply move on to the next listing that is more realistically priced – which infers a more realistic (and reasonable) seller.


What makes a street, a street?

The naming conventions for streets and avenues has always intrigued me. In a housing market like Manhattan, a single family home is less valuable on a wide well-traveled avenue versus a street which tend to see less traffic. Take Park Avenue in Manhattan. A single family (Townhouse) is generally less valuable than the same house located around the corner on a street.

Here’s a great Vox explainer video on this. And don’t get me started on crescents!

Post-Election Manhattan Market Anecdotal Out of Context Update

I’ve long said that the biggest change to the housing market after the election is over is the fact that the election is over. Some ridicule the idea that using the the term “uncertainty” is a crutch and means nothing. I’m not sure about that. Mortgage rates jumped and consumers are refinancing and seem to be pulling the trigger on purchases (anecdotally) a lot more in the past few weeks.

One of my appraisers got this comment from an agent of sub-million Manhattan listing that just got the contract signed:

we had 10 above ask all cash offer

And the Wall Street Journal seemed to base the post-election resurgence in downtown Manhattan on a press release about 5 contracts signed at a new development known as 30 Park Place. We do not know the discounts they were offered, if any or other details. The article goes on to link commentary made before the market corrected in 2014 with now. Still, I do think we could see an uptick in sales with the election out of the way as a release of pent-up demand.

Here is a chart I discovered that was based on data published by our firm (which includes recent closings of old new development contracts).



Form versus Narrative

Well it’s been a couple of weeks since I’ve actually appraised – with vacation and the holidays. Next week I’m going to inspect what could be a $50 million single family townhouse in Manhattan. I have been in townhouses worth double that but I always marvel at the idea that I can do it on a form. Think about the size of the dollar amount that a 5% or 10% adjustment infers, yet we do it just like it was a $700,000 property in the suburbs. It just fits. For single family appraisals outside of mortgage lending on very high end properties, I find it amazing that some appraisers rely on narratives, or have convinced their clients the format provides more information and insight.

It’s a running joke in our firm that a narrative appraisal report of single family properties in my market – often by SRA and MAI designated appraisers – seem to be about 98% boilerplate and 2% content. We call those reports “appraisals by the pound” because the intent is to justify a higher fee for more “bulk.” That’s ridiculous. We beg clients not to require them for single family appraisals and are usually successful.

I remember once an appraiser in my market with a terrible reputation was on the witness stand in a divorce case for opposing counsel. He actually said that a narrative format provides more information and therefore I was deliberately misleading the court by using a form. Of course I had a field day with this and used my description of better as a narrative appraisal argument as “appraisal by the pound” as a way to get a higher fee. I got a laugh out of the judge and felt I played a role in a very favorable outcome for our client. That same appraiser actually called me a few weeks later for comps. It was as if he became a different person when under oath. I won’t help or be associated with that type of person. I enjoy a great relationship with appraisers in my market who make a living criticizing each other’s work in court. As long as there is a decorum of professionalism and no personal attacks, I take it as free advice to make me better. And from my perspective, forms are better for single family property appraisals.

“Modernizing Appraisals” is the new catch phrase?

No offense to the participants in the recent appraisal-related testimony in Congress but I found it strange that no actual appraisers were included for a discussion on appraisal reform. Voice of Appraisal’s Phil Crawford mentions it in his always must to listen to podcast.

There are a lot of great appraisal posts in the links below.

A Brilliant Idea

If you need something rock solid in your life (particularly on Friday afternoons) and someone forwarded this to you, sign up here for these weekly Housing Notes. And be sure to share with a friend or colleague if you enjoy them. They’ll make yo-yoing look easy, you’ll understand the difference between yams and potatoes after Thanksgiving and I’ll get better at parallel parking.

See you next week.

Jonathan Miller, CRP, CRE
Miller Samuel Inc.
Real Estate Appraisers & Consultants

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