Matrix Blog

Canadian housing prices are on the rise, but the underlying conditions do not suggest the threat of a bubble similar to that of the late 1980s, according to the Bank of Montreal.

I would hope Bank of Montreal (BOM) learned their lesson from the late 1980’s when they were active construction lenders in the New York market with what appeared to be loose underwriting standards.

BOM says the same things that economists are generally saying in the US: a modest rise in mortgage rates will temper demand but there are concerns about affordability.

Tags: Canada, Canadian Housing Market

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Here is an article written by an independent thinktank on public policy initiatives called oddly enough, The Independent Institute

“Making Sense of High Housing Prices” discusses the fact that once governments started adopting land use and urban growth controls, prices began to climb.

Economists Edward Glaser of Harvard and Joseph Gyourko of the University of Pennsylvania studied the effect government restrictions have on housing prices in a number of markets around the country. They found that 90 percent of the difference between physical construction cost and the price of new homes could be attributed to government restrictions on building. Only 10 percent of the difference was due to intrinsically scarce land.

In fact, Glaser & Co. did a study on Manhattan housing that asked the question “Why is Manhattan so expensive? (it also refers to a Miller Samuel / NYU research paper).

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Not everyone is taking a bath…

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According to a study released Tuesday by the Center for Housing Policy

Surging housing prices are putting the dream of a home beyond the reach of middle and low-income workers in many cities around the country

The center is an advocate for affordable housing.

Home ownership has seen significant expansion over the past 10 years with Fannie Mae now claiming that 69% of Americans own their homes.

Wages have held flat for community workers and aren’t likely to rise in the near future. The median home price is consistent with that of the National Association of Realtors [Note: PDF].

Tags: NAR, National Association of Realtors

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Media coverage of the words “real estate bubble” was analyzed by our public relations firm, Publitas. The results were very interesting.

Admit it. Many of us now groan when we read another story of the housing bubble or crash (whether its true or not). The story cycle has run its course.

This is a very similar methodology employed by Robert Shiller of Yale as covered in the New York Times.

However, the Shiller analysis uses a multi-year Lexis-Nexis news search seems biased toward the later years. Major news organizations have a much greater presence on the web now than they did, say 8 or 9 years ago. The absolute number of hits should be far less in earlier years. His analysis should have been done as a percentage of total news stories.

Here’s the problem…

People are now using the logic that since information on the housing bubble has been pumped out into the mainstream ad nauseam, the odds of a market correction is now somehow less since more people are informed. Matrix thinks this is very misguided and relies on “mob mentality” too much. Safety in numbers is more of a distraction. Now that the market has made it through the hailstorm of coverage, we can start really looking at what is going on in real estate.

Tags: Robert Shiller, Pubic Relations

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According to a WSJ.com article, some sellers are cutting prices on their luxury homes. Since this sector has been the target of new development for several years, it follows that the luxury market would see less of a “froth” than the balance. Unfortunately for developers, the luxury sector sees the highest margins.

Anecdotally, I think that media coverage of high end sales has probably induced sellers to out price the market. In other words, list prices saw greater appreciation than sales prices. I would expect to see an increase in negotiability and an expansion in marketing times in this sector until supply is absorbed.

However, I don’t hold out much hope for that as mortgage rates saw steady gains over the past 6 weeks.

Tags: Bankrate.com

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Making Sense of Manhattan @ the 92nd Street Y

After the positive feedback received for last year’s panel discussion of the same name, Braddock & Purcell (Kathy Braddock and Paul Purcell) are again hosting the same panel members at the 92nd Street Y this fall.

Last year Paul Purcell asked tough questions of all three panelists: Pamela Liebman, Alan Rogers [former Chairman of Douglas Elliman] and yours truly. I have learned a lot from Pam, Alan and Paul over the years and anticipate that this second edition of the panel will be equally, if not more informative.

Apparently the 92nd Street Y did as well because they booked a [larger auditorium!](http://www.92y.org/seating/kaufmann_seating.asp)

Tags: GSE, 92nd St Y, Corcoran

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Mortgage financing standards continue to ease in order for lenders to stay competitive. According to an article in the Wall Street Journal the lending risk has been rising along with the rapid escalation in prices.

What is interesting to note, is that standards are easing for investors as well. The NAR reported 23% of all home sales were by investors in March 2005 while First American tracked 9.86% for the first 4 months of 2005. The First American figures are likely to be low because they don’t include second homes. The spread between these two figures suggests that the secondary home market is significant.

Easier access to financing, keeps the churn going. However, the danger is that the combination of leverage and easy access to funds, combined with rapid price escalation, adds potential volatility to the market.

Live by the sword [financing],
Die by the sword [financing].

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An article by By Mark Hulbert of MarketWatch titled Can it be a bubble if many recognize it as such? wrote a great article titled “Are bubbles only seen in retrospect?” based on research by

Professor Robert Schiller, the author of Irrational Exuberance which predicted the NASDAQ market correction and his recent book Irrational Exuberance: Second Edition which discusses the housing boom.

Professor Robert Schiller, who I admire greatly for his insight on the housing market and for whom I got to meet in the green room at the taping of CNBC Town Hall: The Real Estate Boom [Note: WM Clip] basically says that we are not protected from a housing bubble simply because people are worried we are in one.

He defines a bubble as “a market situation in which news of price increases spurs investor enthusiasm which spreads by psychological contagion from person to person, bringing in a larger and larger class of investors, who, despite doubts about fundamental value, are drawn to the investment partly through envy of others’ successes and partly through a gambler’s excitement.”

Tags: Robert Shiller, CNBC

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The Real Deal – The Real Deal Weekly Interview

I suggested to Amir Korangy of the Real Deal that he begin Podcasting since his publication would be a perfect candidate for it. The Real Deal has access to many interesting people and their content is always changing.

Not only did he look into this technology right away, but he asked me to be the guninea pig…errr…the first interviewee. 😉

From The Real Deal’s Web Site…

Jonathan Miller at The Real Deal Magazine’s first Podcast on July 15, 2005

In The Real Deal’s inaugural interview in its new weekly audiocast series, we sat down with appraiser Jonathan Miller, president of Miller Samuel Real Estate Appraisers and Consultants. Miller’s reports on the Manhattan apartment market are the most widely cited in the industry, and he has been featured in The New York Times, the New York Post and countless other publications including The Real Deal.

With reports showing apartment prices hitting new peaks each quarter but often differing significantly in their findings we asked Miller how he collects his data, and his thoughts on the existence of a real estate bubble. To listen to the entire interview, click one of the links below.

[MP3 Version](/wp-content/The_Real_Deal_Podcast_1.mp3)

[Podcast (RSS) Version](http://www.audibletreats.com/download/podcast/TRD.xml)

excerpt…

THE REAL DEAL: Is there a housing bubble in New York?

MILLER: It’s interesting about the whole bubble psychology the boom and bust orientation in the real estate discussions that have been going on for the last three or four months. Especially because Manhattan is closely tied with the financial markets.

A lot of us remember what happened in ’87 with the stock market crash and subsequent real estate correction that we saw from about the end of ’89 to early ’95. So it is something that is fresh in everybody’s minds, and everybody is trying to relate that to the current experience that we are having now.

When I look at what happened then versus now, it’s apples and oranges, a very different experience. Back then we had a tax incentive-based supply-creation syndrome I made that up, but the idea is that housing came on in large quantities in the mid ’80s because of tax incentives. The 421a abatements gave the incentives to developers to throw foundations in the ground without even plans for what they were going to build just to get the tax credits.

Then all of a sudden in ’86 we had the change in the federal tax laws that eliminated the whole incentive for investors to buy individual units that created a lot of supply. And then we had the co-op conversion frenzy, in which seemingly every rental building that could have been converted was converted. I think the conversion pace today not including 2005, but up through the end of 2004 is something like 10 percent of what it was back then, but that’s largely inclusive of, say, lofts being gut renovated to condo as opposed to existing rental buildings.

As far as today, the situation is we have record low mortgage rates, which are really fueling a lot of the demand and we have an improving but very tepid economy. And we now have supply that is gaining momentum. Your magazine did a great study on the condo inventory that is coming online [in July 2005 issue].

TRD: Thank you.

MILLER: And it’s gaining speed. But it’s still about 3,000 units, give or take, and we have a condo universe of somewhere in the neighborhood of 65,000 to 85,000, depending on who you talk to. So it’s still relatively small. In prior years we were talking about 1,500 units coming online. So the pace is increasing but it’s another 1,500 units a year.

I think the two variables on whether we are going to go into a bubble real estate environment is going to be supply or mortgage rates. There are a lot of other things to look at, but those are two main things. Mortgage rates have been forecasted to increase since the end of 2003, and, generally speaking, they’ve been falling. So, in the equation of supply and demand, it has become a constant.

TRD: Brooklyn has become such a great place for developers to go to because there are so many available lots.

MILLER: For those new developments to come in and be viable they are getting $700 a foot. In Manhattan now, the threshold seems to be you have to be at least at 1,000, and more likely on the new developments you’re talking $1,500.

TRD: If you saw a new development at $1,000 per square foot, would you jump on that and say, “Hey, that’s a bargain?”

MILLER: I guess it’s personal preference. You have to decide whether you like the neighborhood. I’ve always felt the reason why [a neighborhood is] cheaper than a Soho and Tribeca is because it’s not proven as yet for that price structure. So you are going to see more price volatility if you have some sort of market downturn meaning that there is a lot of upside and there’s potential downside.

However, the thing about housing which is very different than stocks, is that, for example, the FDIC defines a housing boom as three years and 30 percent appreciation, and a bust is five years and 15 percent depreciation.

TRD: And how does that compare to our market now?

MILLER: On the upside, we’re about double what their boom figure is. But it’s sort of that idea that on a down cycle, prices tend to be sticky on the downside, that it’s still an asset that’s useable. Real estate is a cyclical thing.

We’ve just seen a lot of the upside over the last five to seven years.

Tags: FDIC, Podcast, Amir Korangy

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