Matrix Blog

Source: WSJ

The housing boom has forced many organizations with valuable real estate assets, to consider what was once unthinkable. In a page one story in the WSJ [Boy Scouts Weigh Merits of Unloading Hot Real Estate: Thinning Ranks, High Prices Tempt Them to Sell Camps, But Locals Put Up a Fight](http://online.wsj.com/article/SB113867804713760699-search.html?KEYWORDS=boy+scout&COLLECTION=wsjie/6month)

Fights like this are playing out across the country, as scouting groups face lean coffers and declining membership. Many councils, especially those in hot real-estate markets, are debating whether to cash in on skyrocketing property values. As a result, struggles — over camp land and all it symbolizes to local residents — have erupted in such states as Michigan, Texas, Arizona and Washington. Mere rumors of a possible sale often spur action by community members. Some try to buy the camps themselves or align themselves with nonprofit organizations to bolster their chances in a bidding war. Others file lawsuits or wage zoning battles.

Boy Scout and Cub Scout participation was about 6.5 million in 1972, but totals about 4.2 million today, excluding new programs. That decline has caused some councils to merge, sometimes creating organizations with multiple camps and not enough money to maintain them. Each Boy Scout council is a corporation, beholden to the policies of the national organization, based in Irving, Texas, but they raise their own funds, manage their finances and make decisions about property and programs.

Organizations like the Boy Scouts, with thinning ranks, are being forced to consider selling off land that, in the case of Bradenton, Florida, is ripe for development. Speaking as an Eagle Scout, once very active in the organization, and knowing how much land is owned by various Boy Scout Councils, it won’t be an easy road as pragmatists go up against those with strong emotional ties to the properties.

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[Here’s an interview with Harry S. Dent on the Market Bubble Theory [Wired News].]((http://www.wired.com/news/technology/1,70034-0.html) The bubble he refers to is the stock market but the housing market will be one of the factors to impact it.

Welcome to the world of Harry S. Dent, an economist and demographic researcher whose 1992 book, The Great Boom Ahead, called the stock-market bubble of the late ’90s when few saw it coming. In his 2004 book, The Next Great Bubble Boom, Dent predicts an even bigger bubble forming over the next few years. That is, before everything crashes down around us.

“Obviously, it’s hard for stocks to take off with oil going straight up to $71 a barrel. It’s hard for stocks to take off when the Fed keeps saying, “We’re going to raise interest rates higher and higher, and we don’t care what the bond markets say about inflation.” And every day, people putting more money into housing speculation is more money not going into the stock market. Now that housing is deflating, there’s no place for money to go. The money has to go back into stocks. We see the Dow at 32,000 to 40,000, and probably on the higher side. The Nasdaq around 13,000.”

“We’re going to mainly see housing prices just kind of flatten — maybe decline a teeny bit. We expect south Florida, the Northeast, California, Las Vegas and markets like that to actually decline, but most housing markets will simply just be at slightly negative or slightly positive or neutral. That doesn’t cause a housing crisis.“

He sees housing leveling off as people move their funds into stocks causing a large run-up in stock prices that ultimately crashes in 2010.

Its interesting how the experts that called a previous market bubble, are the experts for the next one. I am not aware of anyone who has called two in a row, but I may be wrong on this, but it does sell books.

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United Van Lines has been publishing a report on [traffic patterns of the moves [United Van Lines]](http://www.unitedvanlines.com/mover/united-newsroom/press-releases/2006/2005-united-migration-study-01-06.htm) that are ordered within the moving company each year. This report has been published annually since 1977.

Methodology: “For 2005, the accounting is based on the 226,353 interstate household moves handled by United among the 48 contiguous states, as well as Washington, D.C. In its study, United classifies each state in one of three categories — “high inbound” (55% or more of moves going into a state); “high outbound” (55% or more of moves coming out of a state); or “balanced.” Although the majority of states were in the “balanced” category last year, several showed more substantial population shifts.”

Inbound

• While Florida (54.2%) has been inbound since the survey commenced, this year marked the lowest number of relocations to the state since 2000.
  
• Texas (53.9%) continued inbound movement since 1989 and saw slightly (1.3%) more people move in as compared to last year.
  
• As compared with 2004, Washington (53.4%) became the destination for 2.7% more residents.

Outbound

• California (55.7%) – 2005 marks the first time the state has seen a high outbound number since 1995.
  
• Louisiana (57.9%) – With many difficult challenges throughout the year, the state saw 4.5% more outgoing moves after being classified as a balanced state for the past four years.
  
• North Dakota (67.8%) – This year marked the highest outbound migration since 2001 for the state.
  
• Michigan (63.9%) – From the inception of the study, Michigan has been an outbound state.

I thought it would be neat to try to correlate inbound and outbound traffic to housing demand. The idea that a state with high outbound traffic would have lower appreciation rates than states with higher inbound traffic. However, the census data does not fully correlate with this report. I can only assume that its a factor of the client demographic the moving company works with, or this is a flawed methodology.

Nevertheless, United Van Lines map concept is very cool.

US Census Division Map: Change in House Prices By Region

Tags: Commerce Dept, Census

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It is affecting population shifts, congressional representation and housing demand.

_Population Shifts_
In the article [People Fleeing Pricey Coastal States for South, West [USAToday]](http://articles.news.aol.com/business/article.adp?id=20051222070509990001&%20id=505) an analysis of the census data halfway through the decade, Americans are shifting away from the coasts toward more affordable locations such as the Southwest, Southeast and the Rocky Mountains.

The quest for affordable housing and jobs is driving Americans from expensive coastal states to more moderately priced parts of the country.

• At its current rate of growth, Florida will exceed the population of New York in 5 years.

• Upstate New York population losses more than offset the boom in New York City.

• California’s gains were more attributable to births than to new residents.

• Virginia gained more population than 9 northeastern states combined due to employment growth.

_Affordability_
A growing number of people are simply [Too Poor for Hot Housing Market, Too Affluent for Buyer Assistance [Washington Post]](http://www.washingtonpost.com/wp-dyn/content/article/2005/11/30/AR2005113002248.html)

Government officials “are scrambling to provide “workforce housing” — price-controlled homes for families with high five- and even six-figure incomes.”

While urban areas like New York have long provided housing assistance for low and middle income residents, areas like Washington, D.C. have focused on low income. As a result, there are a lot of residents simply priced out of the current boom.

The National Association of Realtors released its affordability index [Housing Affordability Hits 14-Year Low Higher Prices, Rising Rates Hurt Buyers as Creative Loans Lose Some of Their Punch [WSJ]](http://online.wsj.com/article_print/SB113522076238329211.html)

“There are signs that the growing costs of homeownership are also beginning to take a toll on the housing market. “There’s a systematic erosion of affordability,” says David Seiders, chief economist of the National Association of Home Builders. That decline is “the main reason … the market is starting to cool.””

Tags: Commerce Dept, Census, NAR, National Association of Realtors

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Source: Source: St. Petersburg Times

I have always found it interesting that many real estate professionals define market value as the price someone is willing to pay for a property. However this assumption can often be far from reality and is why real estate brokers and real estate appraisers can be at odds on some transactions.

The real estate broker’s job is to get the highest price for the listing they represent, while the real estate appraiser (abridged version) has the responsibility of estimating the reasonable value that a fully informed buyer and a fully informed seller would likely agree on.

What happens when the seller is located on a parcel of land that is of key importance to a larger adjacent development? Thats where reality leaves the picture.

[Take this example, which occured recently in St. Petersburg Florida [St. Pertersburg Times].](http://www.sptimes.com/2005/12/23/Northpinellas/Yellow_house_rings_up.shtml) A modest house was purchased for $76,000 in 1992 and underwent little improvements. The property just recently sold for $1M after being appraised for $141,200. Its a small house on 1/10 of an acre.

The property was a key parcel in a larger development plan and the seller was willing to pay significantly more for the property. A typical mortgage lender would never provide financing on this house for this value because the price paid reflects the investment value to the buyer, not market value to the typical buyer.

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[The FBI provided a press release today concerning [Quick Flip] [FBI]](http://www.fbi.gov/pressrel/pressrel05/quickflip121405.htm)

Operation Quick Flip is designed to show that federal law enforcement recognizes the mortgage fraud threat.

This is great news!

Mortgage Fraud is one of the fastest growing white collar crimes in the United States.

“Mortgage Fraud is defined as a material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan.

There are two types of Mortgage Fraud: fraud for property and fraud for profit:

• Fraud for Property – 20% of all mortgage fraud – usually involves the borrower as the perpetrator on a single loan. The borrower makes a few misrepresentations, usually regarding income, personal debt, and property value, or there are down payment problems. The borrower wants the property and intends to repay the loan.

• Fraud for Profit involves industry professionals. There are generally multiple loan transactions with several financial institutions involved. These frauds include numerous gross misrepresentations including: income is overstated, assets are overstated, collateral is overstated, the length of employment is overstated or fictitious employment is reported, and employment is backstopped by co-conspirators. The borrower’s debts are not fully disclosed, nor is the borrower’s credit history, which is often altered. Often, the borrower assumes the identity of another person (straw buyer). The borrower states he intends to use the property for occupancy when he/she intends to use the property for rental income, or is purchasing the property for another party (nominee). Appraisals almost always list the property as owner-occupied. Down payments do not exist or are borrowed and disguised with a fraudulent gift letter. The property value is inflated (faulty appraisal) to increase the sales value to make up for no down payment and to generate cash proceeds in fraud for profit.

The hot spots for Mortgage Fraud activity in 2004 (per capita) were: California, Nevada, Utah, Arizona, Colorado, Missouri, Illinois, Maryland, Georgia, and Florida.

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[The New York Times](http://www.nytimes.com/2005/10/02/realestate/02cov.html?pagewanted=print) asked my appraisal firm, [Miller Samuel](https://www.millersamuel.com) to research the “flipping” phenomenon in Manhattan, which is noted for its high housing prices and dominance of co-ops. So much has been written about real estate speculation over the past several months in other markets like Florida but no one has quantified the phenomenon in Manhattan.

The idea here is that a real estate market with rampant flipping (we define a flip as re-selling a property within 18 months) as a danger sign for future price volatility. A market based on flips is ultimately doomed, like a fee simple ponzi scheme with a foggy end point. In fact, [developers in Miami encourage flips](http://matrix.millersamuel.com/?p=78) and have sales agents in place (for a 2nd commission on the same property) to sell your unit for you. Easy money.

Our study, as noted in the [New York Times article on October 2, 2005](http://www.nytimes.com/2005/10/02/realestate/02cov.html?pagewanted=print), determined that property flips, after controlling for typical moves like job transfers or changes in income, was about 3% of all sales activity, [far less than the national average of 23% compiled by the NAR. [Matrix].](http://matrix.millersamuel.com/?p=77)

When electricians and health care workers are quitting solid secure jobs to flip real estate, then its time to get out. Fortunately, this is not happening in Manhattan.

So in some respects, one could consider that high housing prices and difficulties with co-ops in Manhattan, actually makes the housing market there less volatile.

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There was another prominent article this week on the housing market. Like the previous post covering today’s [article in the Wall Street Journal](http://matrix.millersamuel.com/?p=133), S&P released a study of the US Housing market that suggests that prices will decelerate and stabilize. A crash is not likely.

The bubble should end with a fizzle, not a bang, said S&P Chief Economist David Wyss

The average US home price is a record 3.1 times the average household income up from 2.6 times in 1960. Home ownership is 69.4%, also a record.

Most price appreciation is located in California, northeast and Florida. S&P estimates that it would take a 30% decline in national home prices to start even a modest recession, although they think that this is unlikely.

Tags: S&P, David Wyss

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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

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[Largest U.S. House Price Increase In More Than 25 Years [Note: Reg.]](http://www.marketwatch.com/news/story.asp?siteid=mktw&dist=nwtpf&guid=%7B932BEF2F%2DCCFF%2D4F55%2DA12D%2D50EC763F42EF%7D); OFHEO House Price Index Shows [Annual Rise of 13.4 Percent](http://www.ofheo.gov/).

[Download a full copy [Note: PDF]](http://www.ofheo.gov/media/pdf/2q05hpi.pdf)

Signficant Findings of the House Price Index (from their press release)
1. Nevada continues to have the highest appreciation of all states; house prices increased 28.1 percent over the past year and 5.5 percent for the quarter. However, for the first time since the fourth quarter of 2003, Las Vegas is not on the OFHEO list of the 20 fastest growing MSAs.
2. The second greatest annual price growth was in Arizona. Over the second quarter alone, Arizona house prices grew 9.7 percent – far surpassing every other state. Arizona’s annual growth rate rose from 20.4 percent in the first quarter of 2005 to 27.8 percent in the second quarter of this year.
3. Thirty of the 265 ranked Metropolitan Statistical Areas (MSAs) had four-quarter appreciation exceeding 25 percent.
4. For the first time, Naples-Marco Island, Florida topped the list of ranked MSAs with the highest appreciation. Bakersfield, California was second.
5. Florida, California, Nevada, and Arizona are no longer the only states represented in the top 20 MSA list. MSAs in Idaho and Utah have now entered the list.
6. Twenty-five states (including the District of Columbia) exhibited double-digit annual price growth and eight states had price increases exceeding 20 percent.
7. Four-quarter appreciation rates in Maryland and Virginia (along with Arizona and Florida) were at their highest levels over the 30-year history of the OFHEO HPI.

What does OFHEO do and where do these numbers come from?

• From OFHEO’s web site: “OFHEO’s primary mission is ensuring the capital adequacy and financial safety and soundness of two government-sponsored enterprises (GSEs) — the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). “

Concerns of having OFHEO as the bedrock for national housing statistics is:

• OFHEO was basically asleep at the helm before the outbreak of the [recent Fannie Mae scandal](http://msnbc.msn.com/id/6070704/), but eventually did what it needed to do when pressured by Congress.

• OFHEO actually uses refinance mortgage recordings as part of the data set in this repeat sales index. If they exclude refinances (which are NOT sales transactions, by the way), the index is actually 10.99%, or 2.44% less than the results that include refinance transactions.

Question: What is the rationale for including refinance data?

Answer: I suspect it would drop the number of transactions in the data set significantly but with $30M+ total transactions, there should be plenty left over to analyze.

• OFHEO only uses conventional mortgage information from Fannie Mae and Freddie Mac. The conventional mortgage limit is currently $359,650.

Question: How does a data set based on conventional loan limit data influence the results of the report?

Answer: The lack of non-conforming mortgage data (loans in excess of the conventional threshold) basically eliminates the upper end of the housing market.
This paints an incomplete picture of the overall housing market.

Don’t get me wrong, its certainly useful to have these stats generated by OFHEO, just don’t bet the farm on them.

Tags: GSE, OFHEO

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