Matrix Blog

Boom Bubble Bust

This Just In: The ‘A’ in ‘Zillow’ Stands for ‘Accuracy’

November 7, 2021 | 8:21 pm | Explainer |

The news came quickly and brutally (especially if you were a ZG investor):

@mortgage_yack #zillow #PINKHolidayRemix #realestate #utahrealestate ♬ original sound – Jack


I jumped on the bandwagon with this:

And this was a perfect post:

Now let’s digest this in the context of price accuracy:

While Zillow’s CEO Rich Barton essentially said early on that he didn’t want their iBuying efforts (Zillow Offers) to be seen as gaming the Zestimate like that dumb viral Tik Tok video inferred a month ago.

@seangotcher

#housing

♬ San Tropez – Illect Recordings


Yet it would seem unlikely that Zillow Offers used something completely separate and conceptually very different from their ‘Zestimate’ because it would be quite expensive and extremely difficult to keep a radical new valuation concept a complete secret. All we know at this point is whatever valuation methodology they used was a complete fail. And to go a step further their Zestimate valuation methodology has long been a complete failure in the accuracy department. But it hasn’t been a complete failure in the consumer credibility department at all. In fact, it’s been quite successful – after all, Zillow weened control of the U.S. consumer away from the real estate brokerage industry who had enjoyed 100 years of gatekeeper status.

This is why the real estate brokerage industry pays Zillow substantial fees to be featured on a search page in their “Pro” offering, using the source data provided to Zillow by them. Its quite diabolical.

So if we consider the Zestimate to be a proxy for the Zillow Offers valuation tool that failed, it gets worse….

The national median accuracy rate of the Zestimate is 2%.

Because they are using “median” and that term is largely ignored by consumers in the phrase “median accuracy rate” that 2% sounds pretty darn accurate. Yet there is no fine print here. The phrase literally means that 50% of the time the Zestimate is within 2% of actual value and 50% of the time it’s not.

And it gets worse…

The median accuracy rate is only within about 2% if the property being Zestimated is currently listed for sale. But if the property is not currently listed for sale, the median accuracy weakens to 7%.

For the Zestimate to move from 7% to 2%, they are reliant on the broker expertise involved to price the property and get it on the market.

Said another way, in order to get the median accuracy rate from 7% to 2%, they need the brokerage community to price the property to get that touted accuracy rate.

To summarize this point:

The brokerage industry gives all their data to Zillow because Zillow marketed to and won the consumer.

The brokerage industry pays Zillow to market them on the Zillow platform because they gave Zillow all their data.

Zillow became a brokerage firm and therefore a direct competitor to the brokerage industry, something they promised early on would never happen.

Zillow uses the brokerage industry to inaccurately price properties, placing them in an adversarial position with the consumer who wants to sell their home.

Yeah, I get it.

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THE CON Episode 1 Debuted This Week And It Was Compelling Because Good Appraisers Lived That Hell Too

August 8, 2020 | 6:15 pm | TV, Videos |

Although I’ve shared the following CNBC clip before, it’s worth showing again given my 15-year ago hairstyle. In 2005, I was interviewed by CNBC in the midst of the Housing Bubble and said that 75% of the appraisals being done then weren’t worth the paper they were written on (hey it was 2005 and they were done on paper, not pdf). They found me because I had just started my Matrix Blog because no one seemed to be listening to appraisers. Incidentally as of this week, Matrix is 15 years old!!!

And the October Research stats presented indicating that 55% of appraisers felt pressure to hit the value rose to 90% in the next year! The outlook was dire.

When I was interviewed, I was trying to keep it together because I assumed my business and my livelihood would be gone by 2008 if things continued. Thoughts about supporting my family of 4 sons and making my mortgage payments loomed large, but I couldn’t be morally flexible unlike many of my local peers who thrived as a result. Most lenders and mortgage brokers didn’t care about valuation quality, just hitting the numbers to make the deal. The appraisal profession became seen as one of “deal enablers” instead of neutral valuation benchmark setters. My big competitors at the time (who were part of the 75%), told me essentially: “Aw Miller, You Don’t Get It.” No, I didn’t. All my “75% competitors” during that era lost their licenses and/or went out of business after Lehman collapsed in 2008.


This is why this new documentary “THE CON” means so much to me. It tells the story that “good appraisers” like me and my firm have never been able to tell. Instead, good appraisers have been lumped in with the bad appraisers who are long gone.

Watch for my appearance along with several of my colleagues around the country in this week’s episode 2!

Think too much risk was the reason for the 2008 financial crisis? Nope. Unmitigated greed and systematic fraud are the real issues — and no one’s discussing them…. Until now. @theconseries is now available on virtual cinema: thecon.tv/watch #TheCon

Beginning now, you can watch entire THE CON series, episodes 1-5 through a network of independent cinema outlets.

Watch Last week’s Episode 1


Miller Samuel at 30, A Short Story

October 4, 2016 | 11:14 pm | Milestones |

matrixswimmingpools

It’s hard to believe that thirty years have passed since my family and I began our Miller Samuel appraiser journey. Here’s a little bit about the experience which reminds me of that old joke about marriage:

“We’ve been married for 30 years and it only seemed like five minutes…under water.” (boom)

It all began in 1986 when my parents, wife, sister, former brother-in-law and I got the idea to form an appraisal company after we had actually raised a substantial amount of money to launch a real estate brokerage firm. My wife and sister were already appraisers. A lawyer that I sold a condo to in 1985 (yes, I was a real estate agent in NYC for a brief stint) found a group of Japanese investors willing to back us. When it came down to it, we just couldn’t sign on the dotted line because we didn’t want to become real estate brokers. Our family’s collective real estate background was mixed, including brokerage, appraisal, management, development, rentals, sales, but most importantly, a lot of analytics and a fascination with technology. We seemed to be different from our competitors, creating our own software (there was no appraisal software), going with the Mac as a platform over PC and collecting any data we could re-use. I remember that we were the first New York appraisal firm to have two fax machines, with a hunt and search two line setup, allowing us to give out only one fax number (LOL). We cold called banks and hand delivered our appraisal reports to better connect with our clients (Who had heard of email?)

It’s a leap of faith to start a new business and in our first month, we received two bank appraisals for a total of $600. Even with the high cost of three couples living in Manhattan, those two appraisal orders felt like $1 billion – and they remain best feeling of validation I ever experienced in my professional career. Within a few months of our launch, our volume snowballed and a year later we nearly tripled in size to 17 employees and lots of personnel challenges.

The October 1987 stock market crash caused appraisal volume to implode. We laid off more than half of the firm shortly thereafter and stuck with an 8-employee line up for the ensuing decade. From this experience we learned a valuable lesson – we were far more profitable with a smaller nimble firm that focused on quality over volume. In addition we were able to do what we loved rather than be mired in personnel issues. Manhattan was our turf and we loved and walked every inch of it.

By 1989, appraisal licensing came on the scene after the S&L crisis. While I had already taken appraisal courses, continuing education became a mandatory requirement for the upcoming licensing law. On a whim, I remember flying on a Trump Air helicopter from Manhattan to Atlantic City for $75 to take an appraisal course for my license – who knew appraising was so exciting? As a self proclaimed cool geek, I felt very out of place standing on the heliport near the Javitz Convention Center waiting with the Atlantic City heavy hitters wearing white polyester blazers, gold chains and white patent leather loafers, ready for a weekend of gambling.

The subsequent years brought us through a recession where the New York region was hit far harder than the rest of the country and distressed real estate was the next wave. Remember the division of the FDIC known as The Resolution Trust Corporation (RTC)? By 1990, 50% of our practice involved co-op foreclosures, a byproduct of the high velocity rental to co-op conversions and a tremendous amount of investor activity that overheated the market – eventually the music stops in any housing boom. Renters were flipping their insider rights to outsiders for their retirement nest eggs.

Other appraisal firms arose in the early to mid-1990s that pushed out many of the “out of area” firms with token representation in Manhattan. Indirectly, these large new competitors ended up being helpful to us as they worked very closely with mortgage brokers and were hyper focused on high volume. We were focused on quality and low to moderate volume. From the beginning, we had worked hard to reduce our dependence on mortgage related work. Mortgage brokers, who were paid only when the loan closed, got to pick the appraisers. That conflict of interest was always mind boggling to me. The mortgage brokerage industry generally did not pay for appraisal reports until they reviewed the value to confirm whether it was adequate to make the deal work. By that point the appraiser had been officially converted from valuation professional to deal enabler. We weren’t very popular with mortgage brokers since we required payment before we would release the value.

By the late 1990s the Dot-com boom was in full force and the irrational exuberance we experienced in the 1980s returned, carrying all the way through the housing bubble. Our firm did not fair very well during the bubble from 2003-2008 because we weren’t morally flexible to work in this new world where risk was assumed to be managed away so reckless behavior was the standard – conflict of interest was the standard. We saw appraiser competitors’ volume explode to the point where they dwarfed us in size. Their commissioned staff were able to do as many as 40 appraisals per week, which included taking the order information, making the appointment for the inspection, getting information from the managing agent, searching for comps, calling agents to confirm condition and other comp information, writing up the report and fixing edits from the reviewer, following up with calls after the client received the report, etc. I should mention that Manhattan still doesn’t have a traditional MLS and sales were not public record until 2006, 20 years after we began. Our firm was based on salaried staff to control quality and maintain professionalism but maxed out at about 8 appraisals per appraiser per week. I never understood the math for the high volume process unless virtually all quality corners were cut. Our appraisal staff is still salaried with benefits today. Back then, those types of “crank it out” firms thrived at the expense of the dwindling pool of ethical appraisers. It was a frustrating period in our history because we could have tripled our volume overnight if we sold our souls. We just couldn’t.

By 2005 it became apparent that the end of the bubble was coming and I still needed an effective way to get the word out – that something was wrong with the mortgage process – not that anyone would listen since they were making too much money. U.S. banks began closing their in-house review appraisal groups as “cost centers,” and loan officers began to call and demand higher values or cut us off and mortgage brokers were dominating the market even more. So I started blogging about it. I figured I had nothing to lose by going public. And thankfully the feedback came quickly. My first blog post on Matrix (I had start writing on my appraisal blog Soapbox the previous month and later merged them) was in the summer of 2005 based on an APM Marketplace radio interview. Later, CNBC came to my office to talk about “real estate’s dirty little secret”…where I said on national television that “75% of bank appraisals weren’t worth the paper they were written on.”

I knew we would be out of business in three years (by 2008) if we didn’t change our business model. So we fired all our national bank clients (before they could fire us) as they went to the appraisal management company model that essentially removed all local market knowledge from inhouse. The onslaught of dumb questions from AMCs made the decision easier (i.e. sample AMC review question: “What does a doorman do in a co-op or condo building?”) We proceeded to focus on the underserved private and legal work – our ability to adequate serve these clients had been hampered from the mind numbing clerical tasks that appraisers were required to do. And it worked! Our new focus on clients that actually wanted to know what the value was and were willing to pay a fair fee for paid off.

When Lehman collapsed in September 2008 almost simultaneously with the bailout of the GSEs and AIG, mortgage appraisal work nearly came to a halt. Thankfully we had already inverted our business model away from retail bank appraisal work in the prior year, around the time that Bear Stearns had collapsed. Our new business model was very contrarian to the state of the market. The change to our business and new revenue streams were inspiring and liberating. Our firm has experienced record sales nearly every year since 2008 but only because we have stayed away from retail mortgage appraisal work. Aside from the very low fees, AMCs that issued appraisal orders for banks kept expanding clerical requests to justify getting half of the appraisal fee. Since the Lehman moment, most of my competitors have gone under and most of the principals either no longer have their licenses or have left the business. Unfortunately for mortgage lenders (even though they don’t realize it) is that most of the “best” appraisers in each housing market have either left the business or moved on to more lucrative market rate work.

The false appraisal shortage narrative being perpetuated by the AMC industry is disturbing since it is really about the shortage of people willing to work for up to half the market rate. There is no shortage of appraisers. Over thirty years of measuring housing markets and valuing property has taught my firm that appraisers, like housing markets, are subject to supply and demand. The current mortgage lending environment is stuck with a solution that ignores that basic fact, so good firms like us move on to greener pastures. As a result, Miller Samuel is not looking to return to generic retail mortgage appraisal work anytime soon. That is a shame because we have 30 years of market experience to share with those banks to help them make informed lending decisions on their collateral.

As the incoming president of RAC, a group comprised of the best residential appraisers in the U.S., I observed that many of our members moved out of the mortgage appraisal business as we did to land higher quality work. This mass exodus of the best appraisers in each market presents an incredible loss to the collective knowledgebase of the mortgage lending industry. Perhaps because of the federal backstop employed at the “Lehman” moment in 2008, the mortgage industry still thinks they have risk management under control. They don’t.

Hopefully at some point in the not too distant future, regulators, taxpayers, government employees and other assorted stakeholders will come to realize that it is for the greater financial good of the taxpayer/consumer to have a mortgage appraisal industry exist that is:

  • competent through education and mentoring
  • allowed to provide a neutral opinion of value without fear of retribution
  • adequately and fairly represented in the mortgage process

These elements do not currently exist. In order for the current disconnect between mortgage lending and collateral valuation to be fixed, it must be understood that:

  • a real estate appraisal is not a commodity, nor is the appraiser
  • real estate appraising is a professional service
  • real estate appraisers are the most essential element of understanding collateral values in order to make informed lending decisions
  • without adequate representation, appraisers will continue to be overrun with scope creep
  • appraisers are subject to the laws of supply and demand like any industry
  • cutting the pay of appraisers by half has an adverse impact on the reliability of the valuation result

It’s been quite a journey for our firm.

Miller Samuel is going to continue to do what it does best, provide neutral valuation opinions on collateral to enable our clients to make informed decisions.

And yes, these past thirty years have felt like holding our breath for five minutes underwater, but it was worth it.

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Greenwich CT Pre-Lehman “Reno, Then Flip” Mentality Is Long Gone

February 26, 2016 | 9:41 am | | Charts |

Fairfield County, CT is one of the more recent editions to our Elliman Report series. Greenwich, CT as a submarket has proven to be a market still strongly linked to the heady days before the collapse of Lehman Brothers in 2008 and the beginning of the financial crisis. There remain many owners of high end homes purchased a decade ago that remain value-anchored to those days of yore.

I took a look at the last 15 years of residential sales, measuring the amount of time that passed from a home’s prior renovation to sale. From the late 1990s to Lehman, there was a compression of time from renovation to eventual sale, reflective of the speculative conditions leading up to Lehman. Reno a home, then sell it. During those days, business cards passed out by doctors and lawyers at Greenwich cocktail parties were either “hedge fund manager” or “developer.” Not so much anymore.

Subsequent to Lehman, the late 1990s pattern that preceded the U.S. housing bubble returned by 2010 and has remained remarkably stable since.

4Q15GR-sincelastreno

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Contrarians React to Quicken Loans Rocket Mortgage Outrage

February 16, 2016 | 2:30 pm | Favorites |

During the Super Bowl advertising blitz, the most controversial advertisement seemed to be (no, not Mountain Dew’s PuppyMonkeyBaby) Quicken Loans RocketMortgage Super Bowl Ad: What We Were Thinking

David Stevens, CEO of the Mortgage Bankers Association was annoyed at the public outrage.

Even the Urban Institute’s Laurie Goodman who is another voice of reason, writes a blog post on Why Rocket Mortgage won’t start another housing crisis.

I am one of those who were angry after seeing the QL commercials that aired before the Super Bowl and my disbelief continued after watching the Super Bowl ad. I lived the insanity and the QL commercial was completely tone deaf and gave me great concern about repeating mistakes in the past. In fact I was so concerned that I made the QL Super Bowl commercial the cornerstone of last week’s Housing Note: Rockets Engineered to Amaze Housing: What was Quicken Loans Thinking?

A week later my view on the ad hasn’t changed and in all due respect to Laurie and David, I think they missed the forest for the trees (there’s a digital v. paper pun somewhere). I’ll explain by going through their own points:

  • Borrowers can give lenders easier access to bank information – this is one of those wiz bang promises we always see with new technology (assuming this product is new technology). But I don’t think anyone is arguing to keep the process arduous.
  • Approvals might be less prone to human error. – Sure, that’s entirely possible although this argument is like saying if there was less air pollution we might all feel better. We would have to assume that borrower data entry is better and it matches up to official documents like tax returns and pay stubs – something that was not a lender concern in the last cycle.
  • Automation may ease tight credit. That’s another one of those wiz bang assumptions that any technology gain – automation is better – remove humans and the process gets easier (again, we don’t understand what the details are of this wiz bang new technology). EZ Pass scanning technology on the highway is far better for toll collecting but it took a few decades to perfect. The mortgage lending process is full of judgments that need to be made and common sense has been removed from the mortgage underwriting process so it can be completed with checkboxes. I contend that automation will NOT ease credit any time soon because automation means a series of lending rules and it will take years to iron out. It may even delay credit normalization as lenders are reluctant to fully trust it. Plus lending continues to remain tight because of bad decisions made in the past and a weak outlook for the future (30 year fixed is below the level just before the December Fed rate hike), not because the process needs to be more efficient. Mortgage origination volume has fallen nearly every year since 2006 so I can’t see lack of automation as holding back the normalization of credit.
  • Digital lending is here to stay. No one is really arguing against digital lending per se. The future across most industries is digital and that transition can be good and bad. The mortgage process is much more digitized than it was a decade ago so disagreeing with the Rocket Mortgage message doesn’t make someone anti-digital.
  • Make a complex process easier for qualified buyers. Of course! If that is what is actually being delivered. It’s a black box and the consumer is getting their information from a commercial that conveys dated message. If David gave a speech in a 1970s era polyester suit with bellbottoms, would his current information leave the audience with a current market impression?

The real reason for the pushback on this rocket thing is not because we are anti-digital, anti-efficiency, anti-credit easing, anti-automation or anti-polyester bellbottoms. The pushback comes from the messenger being the second largest mortgage lender in the U.S. who marketed their product seemingly devoid of any understanding of the housing bubble, which after all, was really a credit bubble.

And it becomes even more clear to me as an appraiser, looking at their complete reliance on appraisal management companies and how awfully unreliable that post-financial crisis industry really is at estimating collateral, that their judgment is flawed in the long run.

The same sort of promises and expectations were made during the run up of Countrywide Mortgage. We are nearly 9 years down the road from the 2007 implosion of American Home Mortgage and those 2 Bear Stearns mortgage hedge funds and yet economically, the world is still in the hangover stage.

I don’t really believe that QL’s Rocket Mortgage product will bring down the world’s economy as we saw with financial engineering in the last cycle. But it is a concern and unbelievable that this was the messaging they chose to go with. As Mark Twain said (paraphrased) “History doesn’t repeat itself but sometimes it rhymes.”

Please watch that commercial again.

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Charts That Don’t Make Real Estate Trends Into A Stock Ticker

December 21, 2015 | 12:10 pm | | Charts |

MLHRSQFT

If you’re a subscriber to the Bloomberg Terminals, as roughly 350,000 people are (paying $1,600+ per terminal per month), then you may already know there are a half dozen charts on the Manhattan luxury housing market. To be clear, these indices don’t suggest that housing price trends should be presented as a stock ticker.

It’s a good thing too, since the thought of making real estate housing markets equate to stocks was inspired by, and then was crushed by, the housing boom-bubble-bust era 2003-2008.

Here’s why a stock ticker for real estate is a flawed (aka dumb) concept:

  • A stock market moves in the context of nanoseconds rather than weeks or months.
  • Contract data is not available market-wide and if it were, lags the market by several weeks.
  • Closed data used in a ticker would lag the market by months.
  • It implies instant liquidity for real estate holdings.
  • Not all property types see high volume so their trends are extrapolated (and thus diluted).
  • It teaches market participants that short term views on real estate holdings are the norm, the way a stock day trader views the market.

While a daily real estate index can be created with relative technical ease, it doesn’t mean it is a good idea. It infers a level of precision that doesn’t exist and an accuracy based on lagging data that is not understood by users.

Those who push the stock ticker idea either didn’t work through the last cycle in real estate, or they didn’t learn from the experience.

We update 3 charts on the Manhattan luxury sales market and 3 for the Manhattan luxury rental market. I have always defined “luxury” as the top 10% of transactions during a period.

Click on the gallery below to open each of the indices.

bloombergmanhattangallery

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The Big Short: The Movie Coming this December

September 23, 2015 | 11:37 am |

Coming to a theatre near you in December…

Aside from playing my favorite Led Zeppelin song “When the Levee Breaks” and being based on one of my favorite books about the housing bust/financial crisis “The Big Short” that was written by one of my favorite authors Michael Lewis (Blind Side, Flash Boys, Moneyball, Liar’s Poker, The New New Thing, etc.) that includes pretty much all my favorite actors – it’s a freakin’ incredible story.

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Bloomberg View Column: Real-Estate Appraisals Are Bubbly Again

December 26, 2014 | 2:13 pm | | Charts |

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Read my latest Bloomberg View column Real-Estate Appraisals Are Bubbly Again. Please join the conversation over at Bloomberg View. Here’s an excerpt…

A key goal of the financial reforms after the housing bust was to prevent banks and other interested parties from pressuring real-estate appraisers to inflate valuations…

[read more]

This particular column blew up the Bloomberg Terminals, becoming the number 1 most read real estate article and the 15th most read of all articles on Bloomberg Worldwide.

Bloomberg12-4-14#1realestate


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Economic Bubble Theory Using Bubbles

December 22, 2014 | 12:03 pm | TV, Videos |

MWbubbleEcon
[click on image to play video]

Ok, so I like making bubbles. Here’s a reason (or excuse) to watch some bubbles – tie it in with economic theory.

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Bloomberg View Column: Housing’s Misleading Health Indicator

November 30, 2014 | 11:00 am | | Charts |

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Read my latest Bloomberg View column Housing’s Misleading Health Indicator. Please join the conversation over at Bloomberg View. Here’s an excerpt…

The National Association of Realtors will release its monthly U.S. existing home sales report tomorrow. Among other things, the report includes what’s known as the absorption rate, or how many months it would take to sell all inventory at the current sales pace. This report and the media coverage around it will inevitably provide the well-worn insight that when the rate is less than six months, housing is “healthy”…

[read more]


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Bloomberg View Column: Housing Bust Wasn’t About the House

November 30, 2014 | 9:00 am | | Charts |

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Read my latest Bloomberg View column Housing Bust Wasn’t About the House. Please join the conversation over at Bloomberg View. Here’s an excerpt…

Unless you live in a cave, you’re no doubt familiar with the outlines of the housing bust that marked the beginning of the financial crisis: Real-estate prices plunged, people lost their homes, banks went under and the economy tumbled into a recession. We are still grappling with the hangover…

[read more]


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Bloomberg View Column: Credit Crunch Lives on in Housing

October 22, 2014 | 5:05 pm | | Charts |

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Read my latest Bloomberg View column Credit Crunch Lives on in Housing. Please join the conversation over at Bloomberg View. Here’s an excerpt…

Don’t be fooled by low mortgages rates, which once again are below 4 percent: Credit for buying a home or refinancing an existing mortgage has almost never been tougher to get.

[read more]


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#Housing analyst, #realestate, #appraiser, podcaster/blogger, non-economist, Miller Samuel CEO, family man, maker of snow and lobster fisherman (order varies)
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