I’m a regular listener to the Slate Money podcast so I was thrilled to be invited to participate.
This week, Felix Salmon, Emily Peck, and Elizabeth Spiers are joined by housing market analyst and real estate appraiser Jonathan Miller to answer all their burning real estate questions including what’s going on with mortgage rates, how do new luxury buildings affect prices, and why is rent so damn high?
Tags: Felix Salmon, Emily Peck, Elizabeth Spiers, Slate+, Slate Money
This is my fourth appearance with my friend Barry Ritholtz, a prolific columnist/blogger, radio show host/podcaster, and wealth management firm head on his Masters In Business show for Bloomberg Radio. He previously interviewed me in 2014, 2016 and 2020.
Barry also posted the interview on his essential Big Picture blog: MiB: Jonathan Miller, Appraiser Extraordinaire in addition to the Bloomberg Masters In Business landing page.
To say we talk a lot about housing and valuation in a crazy market wouldn’t do this fun conversation any justice. I am always thrilled to be in the company of his never-ending incredible lineup of guests.
To listen to the entire one hour and 49 minute show (sorry about that), you can go here:
Tags: The Appraisal Foundation, Bloomberg Radio, Barry Ritholtz, Appraisal Institute, Masters in Business
I hope all my readers (and everyone else) are staying safe and healthy during this crisis – now let’s get to business.
With New York State on lockdown, real estate brokers/agents can’t sell real estate right now because they are not considered an essential business (yet they are in nearby Connecticut!) This declaration determines whether you can or cannot remain in business during a crisis like this.
Are real estate appraisers considered an essential business in New York? Yes. They are in New York State and they are stated as such in the federal Gramm-Leach-Bliley Act of 1999. But the fact that real estate appraisers are an “essential business” is not consistent in the federal language, especially now when many states are, or will be going on lockdown.
My good friend and appraiser/regulator Pete Fontana and I wrote a letter nicknamed: Fontana/Miller Essential Letter of March 24, 2020. This letter combines the scattered references to address this issue in very specific terms using key language in the public record that illustrates the fact that appraisers are an “essential business” now and going forward.
This letter is the first to address this important issue. It was just sent to Congress, state officials, trade groups, agencies, and other groups related to our industry today and went viral industrywide. The feedback from these groups has been immediate and overwhelmingly encouraging and positive.
Please share the Fontana/Miller Essential Letter of March 24, 2020 with your colleagues in the industry, trade groups, state governments, on forums, and with anyone or in any place you think is relevant to our industry.
Real estate appraisers are an essential business in our country, always have been.
Stay safe!
Tags: The Appraisal Foundation, TAF, Andrew Cuomo, Coronavirus, Maxine Waters, Sherrod Brown, Gramm-Leach-Bliley Act, Secretary Mnuchin, Peter J. Fontana, Essential Business, Public Trust, Fontana/Miller Essential Letter of March 24, 2020
Cheddar TV reached out to me on March 11th as I was 4 days into my self-quarantine and my voice sounded quite scary. Aside from bad lighting and a red face, the discussion was long-form in nature covering low mortgage rates, which is why I so appreciate Cheddar’s format.
March 11 was soooo long ago!
Using Skype (which has been improved since Microsoft acquired it to be less of a horror show) I am able to blur out the background so you don’t get distracted by my prized autographed drum head from Lynyrd Skynrd, my 2002 March Madness pool victory plaque and my certificate for passing a 1978 Italian Cooking class in my Dad’s former cooking school in the DMV.
Tags: Cheddar, mortgage rates
[NPR]
Well, it has been an odd couple of weeks brought to you by the global pandemic known as COVID-19 or the Coronavirus. We’ve been self-quarantined in our house for 1.5 weeks with many more weeks to go. I might have to refer to this pandemic as “Cabin Fever” although there are many people that don’t have the benefit of working at home, including one of my sons, who is a police officer.
With falling mortgage rates of the past year or so, many in the real estate community thought:
“oh my goodness, refi’s and housing sales are going to boom with these low rates, and any Fed rate cuts will offset the damage of a plunging stock market and the economic damage of a pandemic.”
But please remember this:
Falling mortgage rates are not a gift.
Rates are cut to stimulate the economy, to offset something terrible that has happened.
Rates have been falling for the past year as the Federal Reserve likely increased rates in the recent past to be able to have something to cut when the inevitable recession arrives. Because of the damage to the U.S. economy from the trade war, the Fed has been forced to act earlier to keep the economy from dropping into a recession.
Since March began, the Federal Reserve brought the federal funds rate down to zero in the first half of March with two massive cuts. With the first cut of 0.5% on March 3, consumers became fully aware that something significant was wrong, and it was associated with the Coronavirus (and oil prices). And surprising to many, national 30-year mortgage rates rose.
Mortgage lenders continue to enjoy the large spread instead of lowering mortgage rates substantially because of layoff decisions made over the past year as refi volume cooled. Most banks cannot take full advantage of the rate cut opportunity because they do not have the capacity.
Since the 2020 DJIA peak of February 12, 2020, of 29,551.42, the market has fallen 28.13% to 21,237.88 as of the late afternoon, an insanely large decline.
However, all of these housing-related workers such as appraisers and agents, are starting to see that market conditions do not include the gift that it will be “business as usual.” They and their colleagues are becoming fearful of their own personal safety and the safety of their families.
In light of this slowdown, some real estate agents have suggested that market times be modified to cast a better light on listings that will languish due to the virus. This type of action is precisely what should not be done. In a global pandemic or worldwide catastrophic event, housing market stats will be internally adjusted by consumers to factor the event into the equation. Cherry-picking stat solutions will breed distrust between agents and consumers.
Open houses as a marketing tool fell 38% in Manhattan which is quite astounding but shows how quickly “personal safety” is becoming front and center with both agents and market participants. The outbreak is clearly expanding.
But now, those real estate agents are seeing home sellers and home buyers change their minds about letting strangers walk through their homes all day, and the “nexus between fear and greed” has shifted to fear.
Therefore the spring market will likely be underwhelming in NYC if downright bad and pushed forward into the future with a possible release of pent-up demand at some unknown future date. Perhaps the same will apply to many regions across the U.S. this spring.
Now wash your hands.
Tags: flattening the curve, pandemic, COVID-19, Coronavirus
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Podcasts
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I joined Emily Myers of Brick Underground for my third interview on their podcast series. The discussion topics are covered here: The Brick Underground Podcast: How does NYC real estate move past ‘peak uncertainty’ in 2020.
Tags: Brick Underground Podcast, Emily Myers, Peak Uncertainty, Peak Luxury, Peak New Development
I was just interviewed by Noah Rosenblatt and John Walkup of Urban Digs for their “Talking Manhattan” Podcast. I’ve known Noah for well over a decade and always enjoy geeking out on the market with him. He’s a data nerd with a real estate agent and day trader background. I’m proclaiming that John Walkup has the best real estate-related last name in the business and is clearly able to “elevate” any real estate conversation.
They weren’t kidding yesterday when they said they were going to get this podcast out right away, placing the interview online this morning. I was speaking to a group of real estate agents on the roof deck of a new building this morning, and four of them told me they had already listened to the podcast and one confirmed that he heard it in the shower and noted that was high praise. Love it.
One of the topics we focused on covered the adjustment for outdoor space in valuation. Throughout my career – when I get a lot of similar inquiries on a particular valuation topic, I turn it into a blog post – here is a collection of value-related posts in one place. One of the most read “value” resources in the collection covers outdoor space in a blog post I wrote in 2010. Admittedly I’m a bit relieved my written methodology still holds up nine years later!
Their interview of me is below. I hope you enjoy it and subscribe to their podcast as I do.
Tags: Urban Digs, Noah Rosenblatt, John Walkup, Talking Manhattan Podcast
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Articles
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Over the years, I have bantered with the Espinal Adler Team (Marie Espinal and Jeff Adler) at Douglas Elliman Real Estate about the market which has been invaluable for on the ground intel. And we’ve become friends. When Jeff and Marie asked me to be formally interviewed for their blog “The Apple Peeled” I was happy to do so, especially because I could veer off the road into issues about the current mortgage and appraisal process. This “The Apple Peeled” blog post: Ask the Experts: Market Dynamics with Jonathan Miller was distilled from the 90-minute conversation (I could have gone on for 5 hours) I had with their team.
I hope you find that this apple was fully peeled:
Jonathan Miller’s Market Outlook
The number of units sold in Manhattan in 2018 was down by more than 14 percent compared to the previous year. The brokerage industry tends to be very linear in its perception of the market, so many believe when the market is rising, it will rise forever. And, in-turn, when the market falls, it will fall forever. That approach can lead to overreaction.
The 10-year Challenge (2009 vs. 2019)
Some analysts are even comparing the current cycle to the last downturn and the housing bubble in 2009, but Miller outlined quite a few differences between then and now.
In 2009, the average discount from listing was 10.2%. In 2018 the discount was 5.2%. In ’09, Miller said sellers were anchored to the “pre-Lehman, pre-financial crisis asking prices” and had to travel farther on price to meet a buyer. (Miller measures listing discount by the percent difference between the contract price and the price that the property was listed for sale at the time of contract – not when it was first listed). The most recent asking price is “really the moment the property entered the market,” he said.
Miller said there are more buyers today compared to 2009, but those buyers are “very jaded about what value is.” Meanwhile, sellers are anchored to another market completely, he said.
The change in tax laws in 2018 and a several-month stretch that saw mortgage rates rise before recently dropping close to previous levels had both buyers and sellers re-calibrating what value is. That process can take time.
“If a seller overprices a listing, it takes them up to 2 years to de-anchor from what their price was without thinking that they left money on the table,” Miller said. “The disconnect between buyers and sellers is measured by lower sales volume.”
Starter Segment vs. High-End Luxury
For the last two years, Miller has said that the NYC market is softer at the top and tighter as you move lower in price.
Overall inventory is up by about 17%, with a significant amount of supply coming from the studio and 1-bedroom market. Studio inventory is up 21% percent.
“The pace of the starter market is still the fastest of all segments,” Miller said. “It’s just not as detached as it was because now you have more supply.”
Interest Rates and Their Impact
Typically, rates rise when the economy is strong. The low rates we’re seeing today understate the strength of the current economy, according to Miller. “That’s the disconnect.” In the long run, interest rates do not impact price trends. Mortgage rates have trended lower for three decades, Miller said, but housing prices have fluctuated up and down during that same lengthy stretch.
Mortgage rates weren’t wildly different in ’09 compared to today. In a recent report, Miller stated that an adjustable rate mortgage rate averaged 4.38% in 2009 and was at 3.98% using the same metrics in 2018.
Miller said that real estate investors should stop trying to perfectly time the market (both with rate and supply vs. demand). Perfect timing is a concept that was born out of the housing bubble, he said, when investors viewed housing as a highly liquid stock, instead of in its proper context. “(Real estate) is more of a long-term asset.”
In-Depth Look at the State of Appraisals
“There was nothing learned from the bad behavior of a decade ago,” Miller said, reminding himself of a Mark Twain quote. “History doesn’t repeat itself, but sometimes it rhymes,” Jonathan Miller recited. Miller, President and CEO of real estate appraisal and consulting firm Miller Samuel Inc., said federal regulators are acting irresponsibly in their effort to reduce and perhaps even eliminate the need for an appraisal as part of an overall effort to erase “friction points” that slow-down the mortgage application process.
Miller said the regulators were more concerned with collecting fees than they were with protecting the American consumer. He likened the subtle de-regulation to the housing bubble of a decade ago, pointing out that regulators were getting paid by the failing investment banks they were rating back then. Now, he said, regulators and both Fannie Mae and Freddie Mac are getting paid whenever loan volume passes through those agencies. (Fannie Mae and Freddie Mac are Government sponsored enterprises that purchase mortgages from banks and mortgage companies in an effort to create liquidity so that lenders have the capacity to lend to more homebuyers).
The Office of the Comptroller of the Currency (OCC), The Board of Governors for the Federal Reserve System, and the Federal Deposit Insurance Corporation (FDIC) proposed a rule to amend the agencies regulations requiring appraisals for certain real estate related transactions. The proposed rule would increase the threshold level at, or below which appraisals would not be required for residential real estate-related transactions from $250,000 to $400,000.
In response to our request for comment, spokespeople for the FDIC, the OCC, and The Federal Reserve said they do not comment on proposed rules during the rulemaking process.
Mortgage volume has trended lower despite rates falling steadily since the housing bubble, because lenders don’t want to take on risk, Miller said. “They’re in the fetal position. Banks are afraid of their own shadow.”
The tremendous amount of regulation implemented since Dodd Frank has led to mortgage lenders filling Fannie and Freddie’s portfolios with low-risk “pristine” mortgage bundles. But with rates so low, margins are so compressed, regulators need to stimulate volume to make money, according to Miller. “I think (Fannie and Freddie) are emboldened to take more risk.”
The push for fewer mandatory appraisals isn’t the only thing that has hurt the appraisal industry since the Dodd Frank Act was passed in 2010. The evolution of the mortgage industry’s use of the Appraisal Management Company (AMC) has led to a collapse in quality of appraisals ordered by banks, Miller said. He described the AMC as an institutional middle man that takes more than 50 cents on the dollar away from the professional appraisers who do the actual work.
“It’s like a Hollywood actor paying their agent 60% instead of 10%,” Miller said. “The mortgage industry is trying to widgetize the appraiser.”
The AMC is supposed to act as a communication barrier between the appraiser and the loan officer or mortgage broker, to thwart undue pressure to bring appraised values in at specific numbers. But according to Miller, the AMCs are under the same types of pressure that an individual appraiser might face. Some AMCs receive hundreds of thousands of dollars every month by way of appraisal orders placed by big banks. At least at the sales level, the banks apply pressure to the AMC to not “kill deals,” said Miller, who has testified in several class action lawsuits against AMCs.
In many instances, Miller and his firm were hired to do sample reviews of appraisals that came through AMCs. Often, the AMC would utilize appraisers in the market that would always “hit the number,” Miller said. A lot of those appraisers were ignoring valid comps, sometimes from directly across the street that were virtually the same as the subject property. “The AMC encouraged it because they were getting the work,” he said.
Appraisers are pushing back and there are already signs that AMCs were beginning to crumble, Miller said. Quality appraisers are turning away bank work when they know the order is coming in through an AMC because they’re not happy working for less than they deserve and because they’ve been reduced to “form-fillers,” Miller said.
The Apple Peeled Blog, February 12, 2019
Espinal Adler Team at Douglas Elliman Real Estate
Tags: Espinal Adler Team, Marie Espinal, Jeff Adler, The Apple Peeled
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TV, Videos
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I was invited by Julie Hyman at Yahoo Finance TV for a discussion on the weakening luxury housing market and some other topics of interest. I’ve known her for years, after a long run at Bloomberg TV, and am excited about her new opportunity at Yahoo.
When I arrived at the studio, the stock market was being battered (down by over 400 points at the time of this broadcast) by the conflicting interpretations of the recent US/China tariff talks and the results Toll Brothers analyst call. It was exciting to be there during the perfect storm. The conversation shifted from what I was invited to cover, to the developing news story.
Yahoo is ramping up live coverage in early 2019 via 100% internet. Judging by their super cool/huge studio and throngs of people working there, Verizon seems very serious about their investment.
Tags: Yahoo! Finance, Luxury, Julie Hyman, Toll Brothers, Adam Shapiro
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Milestones
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I had a nice reflective discussion with Scarlet Fu and Caroline Hyde, reflecting on two milestones in New York City – 9/11 and the financial crisis.
Miller Samuel CEO Says Credit Conditions Haven’t Normalized Since Lehman
September 11th, 2018, 3:48 PM EDT
Jonathan Miller, president and chief executive officer of Miller Samuel Inc., takes a look at the state of the U.S. housing market 10 years after the financial crisis of 2008. He speaks with Bloomberg’s Caroline Hyde and Scarlet Fu on “Bloomberg Markets: The Close.” (Source: Bloomberg)
Tags: Bloomberg TV, Scarlet Fu, Manhattan, Bloomberg Markets, Caroline Hyde
Note: I have been a subscriber of Valuation Review and it’s predecessor for years. It provides a wide perspective on the appraisal industry and I’ve always got something out of it. Over the past few years, I’ve noticed that the voices in the magazine seemed to be skewing more and more towards national level AMC executives. I suspect the PR departments of these firms make their top executives readily accessible washing out the voices of individual appraisers. So I sent the editor a note offering another perspective with links to my content. He was immediately interested in getting another voice so he interviewed me.
From the Wednesday, March 22, 2017, Valuation Review Article: CEO suggests appraisal industry comprised of ‘lone wolves’.
Reasonable compensation, lender and AMC issues are constantly on the mind of the appraiser. When things aren’t falling into place, the process of assigning blame kicks into high gear with appraisers continuing to look for guidance.
“That’s the problem in that there really isn’t any leadership for appraisers to follow. The false narrative of an appraisal shortage continues to be pushed by AMCs, unfairly tarnishing the image of individual appraisers,” Miller Samuel Inc. President and CEO Jonathan Miller told Valuation Review. “When an industry takes a 50 percent pay cut overnight, good people leave or struggle to hang on and weaker players are attracted-which equals problems. But is it the fault of the remaining individual appraisers?
“AMCs are at a seminal moment,” Miller added. “In what other industry does the company managing the talent get about the same compensation as the talent them? An agent representing a Hollywood actor isn’t going to get $1 million if their client is receiving that same amount for a movie role. It is a broken model.”
Like many in the appraisal profession, Miller strongly believes that there is not a shortage of appraisers. In fact, he more than challenges one reason for such a shortage is that too many burdensome regulations are being placed upon appraisers.
“There is a shortage of appraisers willing to work for 50 cents on the dollar,” Miller said. “The AMC model has hit a wall. AMCs have run out of new people willing to work for 50 cents on the dollar. Sadly, consumers think appraisers are getting the appraisal fee stated in their mortgage documents. They aren’t and typically the appraiser receives as little as 50 percent of it.
“The Appraisal Institute says there is a shortage of appraisers and seem to be championing the AMC concept but appraisers don’t understand why,” Miller added. “I’m not against AMCs; rather, I’m against the execution of business by the AMCs. They treat appraisers as a commodity rather than a professional service.”
For the rest of the story, visit here.
Tags: Valuation Review, Fannie Mae, Appraisal Management Companies, Appraisal Institute, AMC, trainee
Some people are their own worst enemy. And that old saying also applies to financial institutions.
With all the talk about revisiting, gutting or eliminating Dodd-Frank, a significant part of the problem with mortgage appraisal related lending actually exists within the bank risk management themselves. Their over-interpretation of what the regulations require gives outsiders the impression that appraiser related regulations or standards are more onerous than they actually are.
Fannie Mae Allows Trainee Inspections Without Their Supervisory Appraiser
One of the biggest issues today is the lack of mentoring by experienced appraisers because it is not financially feasible under current lending practice. Both banks and AMCs – who act as a bank’s agent – generally do not allow trainees to inspect a property without a licensed or certified appraiser alongside. So in an era where AMCs control as much as 90% of mortgage appraisal work, the lenders are requiring AMCs to require something the GSEs (the party buy their mortgage paper) do not require. This risk aversion is residual from housing bubble collapse. Mortgage lenders today, subjected to low rates and a very narrow rate spread, remain irrationally averse to risk.
However, their underwriting risk management is effectively destroying the future quality of appraisals that will be done on their collateral because the new wave of appraisers is essentially only book-smart without real world context (mentoring). Experienced appraisers can not afford to invest the time to inspect the property with the trainee (in addition to their own inspections) for the multi-year experience period before the appraiser is certified after already taking a 30% to 50% overnight pay cut from AMCs.
From the Fannie Mae Seller’s Guide Update – 2017-01 page 2.
Reporting “Material Failures” to State Boards
In reference to appraisal oversight, let’s consider how banks determine whether an appraiser is reported to their state licensing board.
Dodd-Frank says the following in 12 CFR 226.42(g)(1). Whereby a lender has to report an appraiser for…[bold, my emphasis]
(g) Mandatory reporting—(1) Reporting required. Any covered person that reasonably believes an appraiser has not complied with the Uniform Standards of Professional Appraisal Practice or ethical or professional requirements for appraisers under applicable state or federal statutes or regulations shall refer the matter to the appropriate state agency if the failure to comply is material. For purposes of this paragraph (g)(1), a failure to comply is material if it is likely to significantly affect the value assigned to the consumer’s principal dwelling.
When the CFPB was asked what they meant by a “material failure” – the following table shows the difference between material and non-material. So how much is a material failure? A value off by 2%, 10% or 30%?
And by the way, the third option for reporting a material failure seems absurd although I suppose it has to be said – Who is dumb enough to admit that they accepted the assignment because they knew they would “make the deal” happen. The obvious lack of a definitive paper trail in such a situation makes this very hard to prove.
I’ve always had a problem with setting rigid rules in considering the concept of appraisal oversight. With valuation expertise, how does a state agency apply hard rules to value opinions, comp selection and adjustments, etc.? There needs to be a great deal of latitude for regulators and an “I’ll know it when I see it” approach should be allowed.
Separating gross negligence from negligence
Here is the rule.
“Performing an appraisal in a grossly negligent manner, in violation of a rule under USPAP.”
While subjective, it represents a very severe extreme to which an appraisal would be reported to a state board. The rule goes on to say…
“Accepting an appraisal assignment on the condition that the appraiser will report a value equal to or greater than the purchase price for the consumer’s principal dwelling, is in violation of a rule under USPAP.”
But big national mortgage companies today like Wells Fargo and others are reporting appraisals to state boards where the value is not supported. ie weak comps, unreasonable adjustments, etc. Reports with those issues may, in fact, be negligent but do not fall under the definition of gross negligence. Let’s not wreck an appraisers career because they missed some better comps. Once these reports are referred to the state, the state must investigate. It opens up the appraiser to more risk of unintended consequences. Think of a scenario where a cop pulls over a driver for a missing taillight and learns that the driver doesn’t have his wallet with him.
Gross negligence requires a much higher test than applying it to an appraiser who is just being stupid.
It is defined as:
Gross negligence is a conscious and voluntary disregard of the need to use reasonable care, which is likely to cause foreseeable grave injury or harm to persons, property, or both. It is conduct that is extreme when compared with ordinary Negligence, which is a mere failure to exercise reasonable care.
Tags: Fannie Mae, CFPB, Dodd-Frank, Wells Fargo, Gross Negligence, USPAP
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Jonathan Miller is President and CEO of Miller Samuel Inc., a real estate appraisal and consulting firm he co-founded in 1986. He is a state-certified real estate appraiser in New York and Connecticut, performing court testimony as an expert witness in various local, state and federal courts. He holds the Counselors of Real Estate (CRE) and Certified Relocation Professional (CRP) designations. He is an Appraiser “A” Member of the Real Estate Board of New York and a member of Relocation Appraisers and Consultants, Inc.
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Forbes ('20-)
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'Three Cents Worth' column 3CW ('05-'16)
When Curbed was acquired by Vox, my eleven years of 3CW chart art and column links were broken on Curbed NY, Curbed DC, Curbed Miami, Curbed Hamptons, Curbed LA, and Curbed Ski.
Many of my 3CW charts can be found here:
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Op-ed column ('14-'15)
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Huffington Post (09')
Favorite "How to Value" Posts
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