Matrix Blog

Back in January, David Lereah, former chief economist for the National Association of Realtors, came clean with the Wall Street Journal. It appeared to be more of a timed interview to coincide with the start of his new venture.

Mr. Lereah, who says he left NAR voluntarily, says he was pressured by executives to issue optimistic forecasts — then was left to shoulder the blame when things went sour. “I was there for seven years doing everything they wanted me to,” he said, looking out his window to his tree-filled yard in this Washington suburb.

Of course his successor, Lawrence Yun, who started off with the same hard core spin, but a few months into the credit crunch pulled back from his wildly optimistic ways which was, for lack of a better word, refreshing (relatively speaking).

Coverage after the WSJ article was here, here, here and here, etc. You get the picture.

The spin from NAR was excessive and offensive during his reign – so much so he inspired blogs like David LereahWatch and kept the blogosphere full of content for many years. I remember thinking the disconnect of his press releases during his reign was significant and infuriating.

I got to meet him in the green room before we were both on a CNBC special in 2004 at his height (I was an obviously lesser figure in the program) yet he seemed embarrassed about his prognostication.

It’s hard to imagine that NAR and Lereah were not acting as a team in the false message delivered in a procession of press releases. Although both have separated ways, NAR and Lereah are still at it.

MarketWatch did a humorous recap of the major forecasting errors provided by Lereah.

So why am I bringing all this up when I said I was tired of the topic of Lereah?

Because I came across a press release today from his new venture Reecon Advisors, Inc. For $495 per year, you can get to hear what Lereah thinks about the housing market – he writes his newsletter from home and has less than 50 subscribers but hopes to get more. Because he is now independent, he will provide an non-biased viewpoint. Ok, doesn’t the very fact that he would say this completely discredit because it infers – he – can – be – bought. Why is now different?

Listen, I don’t fault the guy for trying to make a living. After 7 years of hard core spin, a subsequent apology that confirmed this, mockery by the blogosphere who outed his frequent misdirections, and later disenfranchisement with NAR, who on earth would actually subscribe?

The web is a beautiful thing. You can set up a web site and appear like a big research think tank. Makes your head spin doesn’t it.

Tags: CNBC, Lawrence Yun, David Lereah, NAR, National Association of Realtors

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Ok, here’s kind of a fun interview that was posted today on Who’s Who In America. Are you kidding? It’s about me. I read my interview to confirm if it was actually about me. It was. So read it.

Here’s the synopsis as I presented it:

• I lost my faith in humanity caused by a morally flexible business environment
• Then I saw it coming
• But I warned everyone
• Yet no one listened
• So I decided to keep toiling
• Because I believed in my appraisal expertise
• Made easy because I love what I am doing
• And finally the sky fell
• Suddenly people were looking for honesty in a sea of doom and gloom
• My faith in humanity was restored

The typical rags to riches (in theory) ethical appraiser story you read about every day.

Who?

’nuff said.

4 Comments

On New Year’s Eve, we were surfing tv channels and saw the usual fodder of the Dick Clark-Carson Daly-Celebrities excited to be in Times Square-rock bands-yelling revelers-ball dropping-confetti falling expected festivities. My son wanted to watch the Robbie (son of Evel) Knievel jump on Fox so I acquiesced. Not to take anything away from Robbie Knievel but it was a routine, mundane boring type of jump. My expectations were a lot higher and a number of my friends had the same reaction.

Then we switched over to ESPN and saw another “Robbie” make a jump. Robbie Maddison made the most amazing motorcycle jump (actually 2) I have ever seen and, of course the up and down ramps symbolized the housing market pattern of the past several years (sorry I can’t help it). Please watch – it’s worth a look, I promise.

Last year he went the distance (322 feet).

Of course, the moral of the story is along the lines of, even with the sharp decline after the sharp incline, he, of course, lived. Notwithstanding that Robbie has to be insane. In his pre-jump interview, he was hoping young people learn from this by going big.

Trillions of dollars later, the financial system can’t afford to “go big”.

Happy New Year, everyone.

3 Comments

I like to check in with bloggingheads.tv periodically – the topics can get pretty abstract for my limited intellectual capacity, but every so often it strikes a chord and today was one of those days – I saw two clips that appealed to me (They caught my attention initially because I know and admire 3 of the 4 the participants). The two sessions were covering the “subprime” situation but seemed at odds about interpreting the risk of existing financial instruments. Great comments on these posts as well.

A commenter from Yves and Dan’s excellent but far too short “Slums of Greenwich, CT” writes:

An intereresting thing here was that the interlocutors implied that the shadow banking system, and here one suspects that they mean the derivatives market, poses greater risk to the financial system than do the poorly underwritten residential mortgages. This is the reverse of what the majority of people think. It makes sense to think that the greater risk is posed by the securities which underly derivatives, that the risk posed by derivatives is entirely derivative.

In the next segment, The Subprime Solution, Professor Shiller, who has been making the rounds with his recent book suggests we don’t “blame” anyone for the crisis and discusses his ideas for a solution – the devil seems to be in the details. In the background hovers his life’s work, the advocacy of a housing derivatives market to enable investors to manage risk.

Here’s a representative comment on the post:

I understand his work-out proposal, and insofar as it would remove some uncertainty and provide a mechanism to adjust nominal terms or contract-time expectations to unexpected situations I can see the appeal, but wouldn’t all of this be incorporated into the expectations of the lender, secondary purchasers, and buyer at the time of the contract? It seems like the plan would have to make mortgages more expensive (relative to today’s–or really yesterday’s market price) to the borrower and less attractive to the secondary market. If the new contract terms were fully incorporated into the mortgage price up front, how will this solve the problem; it seems like it would shrink the market for mortgage lending without affecting the asset bubble dynamics overall. Homeownership is extremely politically popular–how would Prof. Shiller counteract this fact, in his (correct) push to remove the many subsidies for home purchases?

A fun way to deliver commentary, bloggingheads is available as a download, but it’d be a lot easier if it was a videocast via itunes.

Tags: Sub-Prime

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The 4th New Development Forum held by The Real Deal magazine, led by publisher Amir Korangy packed the house yet again, the second consecutive year the event was hosted at this venue.

Larry Silverstein, the storied developer and owner of the World Trade site, shared insight and his vision for the downtown market. After all, tomorrow is 9/11.

I was initially concerned because most of the panelists have commercial rather than residential real estate backgrounds. But they spoke in the context of both and it was very informative. I did miss Mark Zandi, founder of Economy.com whom I greatly admire for his analytical insights, who had to cancel at the last minute.

Stream of consciousness:

• Amir, you are unable to think small. Congratulations once again for pulling off another one.
• Stuart – I met your parents – don’t worry, I put in a good word.
• Lauren – keep the web site going, but still call.
• Brian – You’ve got the richest voice in business news television and can moderate with the best of them.
• Cathy – the plum color worked – thanks for keeping me in my place.
• Lock & Josh – Offering a great vehicle for listing advertising, better yet, Josh with a tie on (if Lock wore one = end of the world).
• 30 second advertisement onstage before the event showed Bruce at C&W and me 120 times (at last count) on the big screen.
• The best Real Deal bag yet – to replace last year’s model.
• Happy that the audience was very supportive of the opening sponsors.
• 3,000 attendees suggests real estate is not dead in New York, no?
• I ran into my attorney at the show.
• Larry taught us all the importance of cycles and taking the long view – and we knew he was right.
• Larry thinks that luxury development prices, on an average sales price basis, will be higher next year than this year.
• Bob emphasized segmentation and shared a 1% cap rate story. He knows his craft.
• Steven was particularly articulate, being the first to be open about looming problems and answering my question about the new development pipeline.
• Charles recently learned how to calculated IRR but probably has a higher IRR than hedge funds that live and die by formulas like cap rates.
• Barbara continues to radiate – her marketing contrarianism can intrigue.
• Don is looking at a $13M penthouse and was by far the most bullish on Manhattan – it’ll be back in a year?
• Michael Shvo was at the event – he was the main draw card at the 2nd forum held at Cooper Square two years ago. That one sold out too.
• Ran into a former dotcom era real estate development guy who lost millions (of other peoples money) but is doing very well now.
• Paul, with beard, is itching to be a major player again in the brokerage business.
• After asking my question to the panel, 2 people in line behind me told me I asked their question.
• It is apparent that the audience has come to terms with the new market reality.
• Don’t hold your breath, real estate is still first in the New York conversation.

And that’s the real deal.

Tags: Michael Shvo, Amir Korangy

1 Comment

The Real Deal magazine’s New Development Forum at Lincoln Center was sold out at the 3,000 capacity venue last year. For lack of a better description, it was fun.

So this year, I was more than happy to help spread the word (all 3 seconds worth). The ad is running hourly on CNBC on Time Warner Cable and on NY1.

Since Publisher Amir Korangy knows how to pack content into his magazine, there’s no doubt he’ll pack ’em into Lincoln Center for another sell out. He lined up a group of interesting guests and with the housing and credit markets in turmoil, this event will prove especially informative.

To buy tickets

Tags: CNBC, Amir Korangy

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Source: NASA

Its the originals versus the copiers. Its the creative versus the mundane. Its the celestial evangelists versus the card carrying masons.

The New York Times had a very lengthy article today, worthy of a real estate section lead story today on the naming of a new residential development. There has been a rash of new condo developments in New York that are named for stars (the celestial kind). In fact, there have been a rash of new condo developments…period. Theoretically, most have names so it is hard not to be confused.

There are developers who favor the “star name” concept and those who don’t. Each camp contends that their originality or beliefs are more effective in selling their product. Each seems to be bragging about how effective their strategy is.

Try proving a project name’s effectiveness with empirical data.

I remember speaking with an onsite broker at a Trump building in the late 1980s (when Trump, like most developers, fell on hard times) who shared her thoughts on the subject. She (I can’t remember her name) came up with the name for The Promenade, a mid-1980s project whose developer, Glick, later became overextended losing at least one project (The Horizon) to a lender, Chase.

She had come up with the name…

…back when real estate
was fun.

The NYT article sounded a bit like it originated from a PR pitch for the Ariel project in the Upper West Side to create awareness (that the name, ironically, did not seem to do) but it was a well written fun read.

I recall how overused the Starchitect label became in new development several years ago. Every project was associated with some individual that consumers were supposed to know.

I would guess that most consumers didn’t know the architect names before the marketing push and the overused effort numbed the consumer. Next: building names.

With so many projects coming on line these days, their names seem to blur together. I always prided myself in remembering the name and facade appearance of most of the 4,000+ Manhattan co-op and condo buildings in our own database (with this trivial skill I still can’t retain anyone’s name at a cocktail party or the capital of Sri Lanka).

Does a name matter? To some, I am sure it does.

How about names for feelings or emotions? “Aggravated”, “Impatient”, “Rushed”, “Annoyed”, “Panic”, “Confident”, “Rage”, “Bullish”, “Obnoxious” come to mind as potential choices.

Or better yet, how about swear words?

Heck no, families will live in those buildings.

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It’s bad enough that the current NAR chief economist has made himself irrelevant by continues to say some crazy things about the housing market:

Two things homebuyers shouldn’t have to worry about is a recession or long-term credit crunch.

Yun, who admits that he has to balance empirical data with a role of advocacy for the housing market, said that while the beginning of 2008 has been weak so far, the second half of the year should see an uptick that could lead to home value growth of more than 20 percent in the next five years. “I think there is enough momentum to bring the buyers back into the market,” Yun said.

His adventures are well chronicled in Lawrence Yun Watch which followed the widely read David Lereah Watch who was his predecessor.

Now we are seeing the former cheerleader for NAR, David Lereah espousing negative views on housing.

David Lereah was the poster boy for all that was wrong with the housing boom. He wasn’t that subtle about spin, or perhaps an organization like his didn’t have the blogosphere to contend with before he came on the scene.

David Lereah moved on to Move and when they experienced problems, moved on to his startup Reecon Advisors, which provides advice to Wall Street. Interesting. Didn’t Wall Street read the newspapers during the housing boom? What advice are they looking for?

I guess the only point to this post is that I find it amazing that someone, who is so smart and articulate, take the dubious path that he took, and still be able to sell books and be paid for advice, which contrasts what he doled out for years with NAR and apparently trained his successor well.

I have so much to learn.

Tags: Lawrence Yun, David Lereah

3 Comments

It’s About Soccer, Not Football

Chalking this up to weird timing, but Treasury Secretary Paulson announced plans a few weeks ago to fix the financial markets. It would take a long time to legislate and would not likely be completed before President Bush finishes up his term. What the housing market really needed back then, was leadership on solutions covering the immediate problems such as the lack of credit availability or liquidity and a US economy teetering towards a recession.

In James Surowiecki’s excellent Parsing Paulson piece in the New Yorker, he notes:

As the press has noted, the plan would consolidate our myriad and overlapping regulators into fewer, bigger ones. But the most interesting thing about it is something subtler: a push to move from our current system of regulation—often known as “rules-based”—toward a “principles-based” approach. In a rules-based system, lawmakers and regulators try to prescribe in great detail exactly what companies must and must not do to meet their obligations to shareholders and clients. In principles-based systems, which are more common in the U.K. and elsewhere in Europe, regulators worry less about dotted “i”s and crossed “t”s, and instead evaluate companies’ behavior according to broad principles; the U.K.’s Financial Services Authority has eleven such principles, which are often deliberately vague (“A firm must observe proper standards of market conduct”). This approach gives companies more leeway in dealing with investors and customers—not every company needs to follow the same rules on, say, financial reporting—but it also gives regulators more leeway in judging whether a company is really acting in the best interests of shareholders and consumers.

Football (Rules-based)
In a rules-based environment like Wall Street has now, there a lot of rules that the financial institutions must follow and the regulators enforce the rules. Football, like most American sports, is heavily rule-bound. There’s an elaborate rulebook that sharply limits what players can and can’t do (down to where they have to stand on the field), and its dictates are followed with great care.

Soccer (Principles-based)
The regulators have more authority to interpret and pass judgement on the activities of Wall Street. Soccer is a more principles-based game. There are fewer rules, and the referee is given far more authority than officials in most American sports to interpret them and to shape game play and outcomes. For instance, a soccer referee keeps the game time, and at game’s end has the discretion to add as many or as few minutes of extra time as he deems necessary. There’s also less obsession with precision—players making a free kick or throw-in don’t have to pinpoint exactly where it should be taken from. As long as it’s in the general vicinity of the right spot, it’s O.K.

Not surprisingly, Wall Street favors the principles-based approach rather than rules based (it’s likely to be less complex and less onerous to comply with). Paulson is an ex-Wall Streeter.

Aside
In Newsweek, one of Henry Paulson’s top Treasury Department aides spoke on how United States and world policymakers are responding to the fallout of the global credit crunch.

The short answer is that we are in the midst of a phenomenon painfully familiar to Americans. From the gold rush to the Internet bubble, cycles of innovation, excess, adaptation and recovery to a point of even greater prosperity have defined America’s economic progress. In the present situation, we are seeing the rough edges of the same recent financial innovation that has brought enormous benefits to many investors, businesses and consumers. But these net benefits are of little consolation to the Americans whose lives are being seriously disrupted by the current financial-market turmoil. In response, policymakers in the United States and around the world are taking aggressive and targeted actions to stabilize financial markets, reduce the impact of markets on the U.S. economy and protect against the same mistakes’ being repeated.

blah, blah, blah

But now, focus is shifting to correcting the problems on Wall Street with the adaptation of successful new financial products. Thats where the new solutions to the credit crisis will get interesting.

As the immediate remedies take effect, we have also begun to focus on the weaknesses in business practices of financial institutions that this experience has revealed, and on fragmented U.S. and European regulatory structures that had difficulties guarding against or responding to modern challenges. U.S. and international policymakers are acting in a targeted but comprehensive way to address the causes of current market instability with steps including strengthening the oversight of risk management and reporting practices of global financial institutions; enhancing disclosure of and the process for setting values for complex products; changing and clarifying the role and use of credit ratings; strengthening the process by which national authorities monitor and respond to risk, and reforming the mortgage-origination process. In each of these broad categories, the specific proposals are concrete, widely accepted and, in a number of cases, already being implemented by national or international authorities as well as by the private sector.

Charting the source: Where news happens… or, more accurately, where news is reported from [Reuters]

Tags: Europe, Henry Paulson

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Matt Woolsey at Forbes.com covered the World’s First Billion-Dollar Home.

Here’s a tour with photos.

Tags: Forbes

1 Comment

Lost a reliable Internet connection at home for the past 3 days so my posting has been non-existent (but I did change a few lightbulbs with my free time)

Back in the day, I loved to read books like Barbarians at the Gate, Den of Thieves and Liars Poker covering the truth and mythology of Wall Street (now I read books like Pontoon). Michael Milken was directly or indirectly connected to many of those stories, as well as the firm he worked for Drexel Birnham Lambert because of the financial vehicle he championed, the fabled junk bonds.

When the subprime crisis first became kitchen table talk last summer, initially there was discussion that it was another “junk bond” crisis. I cringed because junk bonds weren’t bad in and of themselves. The investors that used or purchased them got into trouble, because didn’t appreciate the risks associated with them. Higher returns, equals higher risk. Sounds a lot like subprime market participants doesn’t it?

Andrew Ross Sorkin’s excellent article in the New York Times today called Junk Bonds, Mortgages and Milken addresses this issue:

“The financial crisis we’re in today stems from the invention by Drexel Burnham Lambert of the junk bond,” Martin Lipton, the superlawyer who co-founded Wachtell, Lipton, Rosen & Katz, said derisively at a conference last month. “You can draw a straight line from Drexel Burnham to the financial world today.”

Milken disagrees:

Critics who compare the subprime debacle to the bubble in high-yield, high-risk corporate bonds that Drexel helped inflate two decades ago are “people who don’t understand markets very well,” Mr. Milken said. He suggests that “their rationale is that both types of financial instruments are risky.”

And he says junk bonds, or those rated below investment grade, “have little in common with mispriced subprime mortgages,” which he says are the real culprits.

“Having financed several of America’s largest home builders, I know a few things about the housing industry,” Mr. Milken said. “What happened to housing was not a failure of securitization, but rather a disastrous lowering of underwriting standards and other unfortunate practices.”

Criticizing securitization — the slicing and dicing of debt that he helped popularize — is “like condemning scalpels because a few unqualified surgeons have injured patients,” he said.

With the introduction of new financial instruments, users tend to go overboard at the end of the cycle and then new regulation is introduced that tends to go to far (ie mortgage current underwriting standards will become a self-fulfilling prophecy).

Ultimately what junk Bonds and subprime mortgages really had in common, were the people that used them. They didn’t reflect adequate risk into their pricing. A more pro-active SEC might keep that in check, but then squash innovation.

I need to change some more lightbulbs.

Tags: Sub-Prime, Radio

1 Comment

According to the Mortgage Bankers Association, there has been a surge in refi applications this week has resulted in a refi-boom. Mortgages rates are falling.

Its been a week since the Fed’s rate cut and we are already seeing reports that the market is stirring in some locations…although this strikes me as basically anecdotal-based reporting, no?

“Blood in the streets!” Ms. Gable said cheerfully. “That’s the best time to buy.”

This week, the average 30-year fixed rate was 5.48 percent; the rate was approaching 7 percent as recently as last summer.

…At what point will buyers be compelled to act, thinking they are getting a price they can live with and a rate they do not want to miss?

One indisputable effect of the Fed action is a rise in refinancing applications, continuing a trend that started late last year.

Talking head hoopla…

It’s hard to understand the world clearly without watching The Daily Show. Here’s the recent appearance by CNN real estate show host Gerri Willis with Jon Stewart on Comedy Central. The whole clip is entertaining, but if you don’t have time, fast forward to the 5 minute mark to catch the talking head chatter (Barbara Corcoran?). Wow.

Tags: Barbara Corcoran, Corcoran

2 Comments