Matrix Blog

According to a recently released report by the Federal Reserve Bank of Dallas; [Has the Housing Boom Increased Mortgage Risk?](http://www.dallasfed.org/research/swe/2005/swe0505a.html) some interesting points are made, but no final conclusion is drawn. Here are some highlights:

Regional Nature of the Housing Boom
Appreciation was more pronounced on the east and west coasts, namely due to restrictions on construction and scarcity of available land. Hawaii saw the highest appreciation at 34% and Texas saw the lowest appreciation at 4%.

House Price Appreciation and the Change in ARM Share, 2004
The use of ARM’s correlate with the areas of greatest appreciation.

Loan-to-Value Ratios
High appreciation states actually have lower overall loan-to-value ratios, (ie more conservative). However, their data does not include second or piggy back data which suggests that these areas may actually not be more conservative. I believe these supplemental loan products emerged as a result of higher appreciation.

Their Conclusion
If analyzing mortgage risk based on the delinquency rates, then high appreciation states are actually a lower risk because they have lower deliquency rates. but…

This is predicated on the assumption that owners can simply sell their home at a profit if they can’t afford the payments. The report suggests, however, if home prices fall, then there is concern of increased mortgage risk.

Comments Off on The Housing Boom And Increased Mortgage Risk May Correlate

In a speech today, Federal Reserve Chairman Alan Greenspan said that the [US economy’s flexibility and stability have fanned speculative excesses [WSJ].](http://online.wsj.com/article_print/SB112912033862066569.html)

[Here’s the text of his speech [FRB]](http://www.federalreserve.gov/boarddocs/speeches/2005/20051012/default.htm)

Although the business cycle has not disappeared, flexibility has made the economy more resilient to shocks and more stable overall during the past couple of decades. To be sure, that stability, by fostering speculative excesses, has created some new challenges for policymakers. But more fundamentally, an environment of greater economic stability has been key to the impressive growth in the standards of living and economic welfare so evident in the United States.

Greenspanspeak Translation: because the economy is so stable and flexible, its more risky. hmmm…

Tags: Alan Greenspan

Comments Off on Greenspan: Stability Fanned Speculative Excesses

After the release of our 3rd quarter [Prudential Douglas Elliman Manhattan Market Overview](https://www.millersamuel.com/reports) last Tuesday to the media and [the frenzy of coverage](https://www.millersamuel.com/press) during the week as a result, the New York Times ran an excellent overview of the market story this weekend called [A Mixed Message [NYT].](http://www.nytimes.com/2005/10/09/realestate/09cov.html?pagewanted=print)

Since then, I have received many inquiries about the state of the market over the week from real estate brokers, wall street firms and lenders to interpret the statistics in the report that were played over and over in the media firestorm. Whats been fascinating about this whole experience is how much coverage was given to the average sales price statistic, which could not stand on its own without explanation. Hopefully I don’t sound too cynical but this stat was likely used because it showed the most negative result.

Here’s a quick list of the highlights of the current market that are most useful:

• The average price per square foot set an all-time record reaching $984 per square foot and rising 1.4% from the prior quarter. This is the telling statistic. The overall market increased this quarter, but not at the same torrid pace as before. The rate of appreciation has eased. In fact, since larger apartments generally sell for more on a per square foot basis than smaller apartments, one could make the argument that the shift in unit mix also tempered this indicator as well.
• There was a significant shift in the mix of apartments that were sold. The average sales price dropped 12.7% because the market share of entry-level apartments (studio and 1-bedrooms) spiked 5% and activity at the upper end dropped off.
  
• Entry-level sales surged because of concerns over modest increases in mortgage rates are expected. Of course, this has been the speculation since mid 2003 but this time, with rising fuel prices, comments from the Federal Reserve about housing, mortgage rates may actually rise.
  
• High end sales activity eased rather than prices dropped. The luxury market average sales price dropped 26% from last quarter because fewer sales at the upper end occurred. There were 17 sales at or above $10M in the 2nd quarter and only 4 sales at or above $10M tracked in the 3rd quarter. In fact, a high end broker contacted me to say there were 5 such sales this quarter, but didn’t realize that one of them closed in the prior quarter. Nevertheless, whether 4 or 5, the sales activity was well below 17 sales. This doesn’t indicate that prices collapsed, but that a shift in the mix of apartments that sold in the upper 10% of the market.
• Inventory did increase this quarter and was more heavily weighted with condos than co-ops. Since inventory came on at generally the same pace as the number of sales eased, inventory built up. This was attributable to seasonal considerations (thats a stretch) and bad economic news, rising gasoline prices, over saturation of bubble speak for the past 6 months and negative economic news relating to the 2 hurricanes.
  
• There are expectations of record Wall Street bonuses at yearend due to the solid year seen by investment bankers and a number of other sectors in the financial district. Historically, Wall Street bonus income has flowed through the real estate economy after the New Year.
  

Here are a handful of all the interviews I did which basically re-iterate most of these points.

[[Focus on Business (Canada)]](https://www.millersamuel.com/press/view.php?V=1128834935Lfglh)

[[Bloomberg Television]](https://www.millersamuel.com/press/view.php?V=1128828123SgtqR)

[[WCBS Channel 2]](https://www.millersamuel.com/press/view.php?V=1128827846FXTkC)

[[WNYC Radio (Brian Leher Show)]](https://www.millersamuel.com/press/view.php?V=1128832735BEaXG)

[[WNYC Radio]](https://www.millersamuel.com/press/view.php?V=1129058323KxZMP)

[[Bloomberg Radio]](https://www.millersamuel.com/press/view.php?V=1129058323KxZMP)

[[WCBS Radio]](https://www.millersamuel.com/press/view.php?V=1128827549vdTfM)

Tags: Hurricane, Wall Street Bonus, Canadian Housing Market, Radio

3 Comments

[In Australia, flawed housing data draws some concerns over their monetary policy thinking [The Australian].](http://www.theaustralian.news.com.au/printpage/0,5942,16700437,00.html”) The Reserve Bank of Australia (RBA is the US equivalent of the Federal Reserve Bank) has been increasingly vocal over the past few years over the quality of housing statistics. “Most of the available price information from real estate agents, banks, the various organisations that monitor house prices and the Australian Bureau of Statistics is flawed to some degree.”

Aside: the housing peak in Sydney was in 2003 and the market has fallen 7% in nominal terms over the past 18 months.

The concerns raised by the RBA are the timeliness of the information, changes in the mix of housing being sold (ie, large, small, etc.) and quality and size of the housing being constructed.

Same issues in the US

We have similar issues with the housing data available here. Census data is delayed. We rely on NAR for a large portion of the statistics but they are an industry trade group – by definition has a bias, and the data is generally lumped together not reflective of changes in housing mix.

The Federal Reserve does not appear to be displeased with the US data available to the public. Are they looking at something else?

Saw a great quote published in a recent issue of The Economist in an article on the accuracy of scientific research papers that may be appropriate when applied here:

Theodore Sturgeon, An American science-fiction writer, once observed that “95% of everything is crap”. John Ioannidis, a Greek epidemioligist, would not go that far. His benchmark is 50%.

Tags: Commerce Dept, Census, Australia

Comments Off on G’Data! Australians Unhappy With Their Housing Data, The US Doesn’t Seem To Be

See prior post on Fed action [[10’s the Charm?: The Fed raises the rate by 25 basis points to 3.5% [Matrix]]](http://matrix.millersamuel.com/?p=18)

The Fed raised the federal funds 25 basis points for the [11th time since June 2004 [FRB]](http://www.federalreserve.gov/boarddocs/press/monetary/2005/20050920/”).

From Fed press release

Output appeared poised to continue growing at a good pace before the tragic toll of Hurricane Katrina. The widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production, and employment will be set back in the near term. In addition to elevating premiums for some energy products, the disruption to the production and refining infrastructure may add to energy price volatility.

[The Fed appears to be more concerned about Katrina’s impact on inflation than on economic growth [WSJ].](http://online.wsj.com/article_print/0,,SB112721762582246026,00.html)

Tags: Hurricane Katrina

Comments Off on Redux: 11’s the Charm?: The Fed Raises Rate To 3.75%

There is interesting commentary provided in the [Bubble Trouble? Not Likely](http://online.wsj.com/article_print/0,,SB112708454245544394,00.html) article seen in today’s most emailed article in today’s Wall Street Journal based on a recently released research paper: [Assessing High House Prices, Bubbles, Fundamentals, and Misperceptions [PDF]](http://www.newyorkfed.org/research/staff_reports/sr218.pdf)

Many feel the current market feels like a housing bubble as evidenced by its rapid growth in housing prices, rising spread between sales prices and rents and the increasing gap between sales prices and income, but is it?

While house prices over the last decade have gone through the roof, the annual cost of owning a house has not. The annual cost of owning, not the price of the house itself, is what homebuyers should (and do) consider when contemplating a purchase.

In our appraisal practice, we observed this change in dynamic about two years ago. Buyers are shopping payment, not price.

Charles Himmelberg, a research economist at the Federal Reserve Bank of New York, Chris Mayer, a Professor of Real Estate at Columbia Business School and Todd Sinai, an associate professor of Real Estate at Wharton calculated housing costs in 46 housing markets since 1980 against rents and found that in nearly all the markets covered, the annual cost of owning a home in 2004 was no higher than the median cost of owning a home over the prior 25 years. This is primarily due to historically low mortgage rates.

This study covers the single family market, NOT the condo market

The authors indicated that condos were much easier to build and more responsive to demand. However, in markets where there was a scarcity of land and more government restrictions, prices were less likely to fall. “For example, even in the face of strong population growth, Houston and Dallas have seen no real house-price increase over the last 30 years.”

Some of the hottest areas like Portland and Miami, costs were 12% to 13% above their 25 year average while other hot markets like LA, Boston and New York were 3% above their 25 year average.

In the late 1980’s, the ratio was 52% in New York, 37% in Boston and 42% in LA, far higher than today.

The study surmises that the housing market does not appear to be based on unreasonable expectations for future growth but that high growth markets are especially vulnerable to mortgage rate fluctuations.

Tags: Chris Mayer, Charles Himmelberg

Comments Off on IXNAY On Sales Price, Its The Cost Of Ownership

The [national summary from the Federal Reserve Beige Book 35 years ago](http://www.minneapolisfed.org/BB/Reports/1970/70-09-su.cfm) seems vaguely similar to today except it was known back then as the [Red Book](http://matrix.millersamuel.com/?p=16) and was not released to the public. Perhaps it is akin to reading your horoscope, it always seems to apply to your life.

The most recent [Beige Book](http://www.federalreserve.gov/FOMC/BeigeBook/2005/20050907/default.htm), released in September, gave a somewhat optimistic view of the US real estate economy with some cooling evident:

Residential real estate was strong, with signs of softening in some markets. Dallas, St. Louis, and San Francisco reported increased activity, with Kansas City, New York, Philadelphia, and Richmond all observing strong sales, but signs of cooling were evident. Atlanta reported sales above last year’s levels in Florida, but demand was beginning to soften. Chicago, Cleveland, Kansas City, Minneapolis, and New York reported residential construction was still strong but down from last year, while St. Louis described it as lagging.

Tags: Beige Book

Comments Off on That 70’s Beige Book: Seems Familiar 35 Years Later

According to a [study by the Federal Reserve [PDF]](http://www.federalreserve.gov/pubs/bulletin/2005/3-05hmda.pdf) blacks are 3 times more likely to borrow through sub-prime lenders than whites. Sub-prime mortgages are typically 2% above prime rates.

[[New York Times] Blacks Hit Hardest by Costlier Mortgages](http://www.nytimes.com/2005/09/14/business/14lend.html?pagewanted=print)

The new report, based on data collected from 8,853 lenders, is the Fed’s first attempt to look for evidence of racial and ethnic discrimination in the booming business in exotic mortgages and subprime lending.

Tags: Sub-Prime

1 Comment

[Core inflation remains in check at a 2.2% annualized rate](javascript:commonPopup(‘/PrinterFriendlyPopup.aspx?type=bondsNews&storyID=URI%3aurn%3anewsml%3areuters.com%3a20050913%3aMTFH93267_2005-09-13_21-26-51_N13617660%3a1′,%20540,%20525,%201,%20’printerPopup’) and that could mean that the Federal Reserve may ease up on their short term rate strategy temporarily, but don’t pin your hopes on it. [Despite the weakening of the economy due to Hurricane Katrina, the Fed appears poised](http://news.moneycentral.msn.com/printarticle.asp?Feed=FT&Date=20050913&ID=5109945) to continue to raise short term rates.

The core inflation stats, which exclude food and fuel, are based on economic data for August so they don’t include the affects of Hurricane Katrina. This bodes well for keeping mortgage rates down in the short term as overall inflation appears under control.

Tags: Hurricane Katrina

Comments Off on Inflation Tame To The Core

You know what I am referring to…

[Businessweek Online did a series of interviews with economists to see if a housing bubble exists.](http://www.businessweek.com/bwdaily/dnflash/jun2005/nf20050622_9404_db008.htm)

While housing experts have described the current situation as either a bubble or at worst case, a boom,when a bubble bursts, the price drop tends to be gradual.

Reportedly more than 50% of the employment gains over the past five years have been related to the housing industry. So it appears to be clear, that a market correction in housing would do a lot of harm to the economy.

A study by National City Bank saw that in 1 in 5 metropolitan areas, housing outpaced income, making them more vulnerable. Fannie Mae is also concerned but says that the middle of the country is less of a concern than the coasts. Location seems to matter.

Americans are more vested in real estate than the stock market. According to the Federal Reserve, the appraised value of housing accounted for 145% of GDP while stocks and mutual funds accounted for 82%.

The Economist Magazine charted housing prices for Britain, UK and Australia. Both Australia and the UK saw far more appreciation than the US, more than double. Now price changes there have fallen below the US pace. The chart makes appreciation in the US look relatively tame.

Comments Off on What If?

With the discussion today comparing stocks versus real estate, its worth taking another look at a research paper from a few years ago: Comparing wealth effects: the stock market versus the housing market [Note: PDF] written by professors Case, Quigley & Shiller. In their abstract they state:

We find a statistically significant and rather large effect of housing wealth upon household consumption.

[The wealth effect](http://www.investopedia.com/terms/w/wealtheffect.asp) is defined as:

The premise that when the value of stock portfolios rises due to escalating stock prices, investors feel more comfortable and secure about their wealth, causing them to spend more.

The impact on consumer spending is more than double when tied to the value of their home rather than their stock portfolio. This has broad implications for the economy and is likely of significant concern to the Federal Reserve in their recent policy of reigning in the threat of inflation.

Tags: Case-Shiller

Comments Off on The Wealth Effect: Stocks vs. Housing

There has been a lot written about how lending standards have eased which has help promote the rise in housing prices with non-traditional loans. The Federal Reserve released a report that said US banks eased terms for commercial and industrial loans while residential loans remain unchanged. [Note: Subscription] 20% of domestic banks saw increased demand for mortgages.

The good news is that restrained lending requirements, especial on investor properties, will help keep price growth in check. However, The Fed report seems to contradict the recently released report by the [Mortgage Bankers Association [Note: Subscription]](http://www.realestatejournal.com/buysell/mortgages/20050802-simon.html?rejpartner=mktw) which said that [lending standards continued to slide](http://matrix.millersamuel.com/?p=10).

The Fed Report also said that use of non-traditional mortgages continues to rise.
[Matrix] [piggyback loans](http://matrix.millersamuel.com/?p=47)

Nontraditional mortgage products include adjustable rate mortgages with multiple payment options and interest-only mortgages.

Interestingly, the lenders reported that less than 15% of the mortgages were non-traditional, which is less than the impression given in the media right now. Still, its of concern because highly leverage buyers are less able to weather a market downturn if one were to occur.

2 Comments