Matrix Blog

Source: Fox News

New York City Mayor Michael Bloomberg on Friday said the real estate market was slowing “dramatically” and only a “miracle” could stop soaring [mortgage rates from eating into housing prices [Reuters].](http://today.reuters.com/news/newsArticle.aspx?type=domesticNews&storyID=2006-01-20T181337Z_01_N20342890_RTRUKOC_0_US-ECONOMY-NEWYORKCITY.xml&archived=False)

The real estate market is slowing down dramatically and we’re going to have a problem down the road,” Bloomberg said.

“If people who want to sell their houses have to wait a longer time before someone comes along and buys it, it would be a miracle if prices didn’t start to go down,” he said.

The Reuters story referred to the [report [pdf]](https://www.millersamuel.com/reports/pdf-reports/PDE4Q05.pdf) I prepare for Prudential Douglas Elliman so perhaps he was referring to the sharp drop in the number of sales we saw in the fourth quarter. He said that if people have to wait longer to sell their properties, then price levels will weaken.

From a macro perspective, it seems like he is going out on a limb in [his characterization [Inman]](http://www.inman.com/blogger/2006/01/everyone-is-expert-real-estate-market.aspx), especially given his business experiences with the sensitivity of the financial markets. A statement like this could cause many in the real estate market pause and wonder what else does he see? He refers to “soaring” mortgage rates but the Fed is signaling it is near the end of its “measured increase” strategy on short term rates and long term rates have been falling since November.

From a political perspective, the city is running a large surplus ($3B) coming in part from the taxes paid by the housing sector and one could speculate he is positioning himself in the next fiscal year to lower the expectations of those who would like to spend it.

Now that the [MTA transit union fell 7 votes short of ratification [NY Post]](http://www.nypost.com/news/regionalnews/61912.htm) of the agreement hammered out by the union leaders and the city, it will be more difficult to take a hard fiscal stance with that kind of surplus.

Other local and state governments seem to be wary of housing’s impact as well: [Housing Slowdown: Impact on State Government [Calculated Risk]](http://calculatedrisk.blogspot.com/2006/01/housing-slowdown-impact-on-state.html)

[Experts say funding depends on strong real estate market [SF Chron]](http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/01/16/BAGLNGNUFH1.DTL)
[Late taxes hint at housing’s toll [OC Register]](http://www.ocregister.com/ocregister/money/homepage/article_949773.php)

5 Comments

Despite signals by the Federal Reserve that we may be nearing the end of their pattern of [measured rate increases [Bloomberg]](http://quote.bloomberg.com/apps/news?pid=10000006&sid=afZ1_rfXRcTc&refer=home), the economy expanded at the end of 2005.

Economic expansion, can prompt the start of inflation, which could mortgage rates to rise. Its not clear yet whether this should be a concern. There has been some speculation that the economic data in November/December is inflationary only because the economy played catch-up after the two hurricanes caused extensive damage to Gulf states.

[The Beige Book is an anecdotal analysis of the economy by 12 regions [Fed]](http://www.federalreserve.gov/fomc/beigebook/2006/20060118/default.htm)

Here’s the national overview for real estate. There is more detailed discussion in each regional analysis:

Many Districts reported moderation in residential real estate activity, although from a high level. Boston, New York, Cleveland, Richmond, Atlanta, Chicago, and Minneapolis reported some cooling in real estate markets. While some of the hottest markets in the San Francisco District have cooled–for example, Southern California and the San Francisco Bay Area–other areas, such as Oregon and especially Hawaii, have reportedly heated up further. Kansas City and Dallas continued to see strong housing markets. And construction and repair work remained brisk in Louisiana and Mississippi.

Conditions in Districts’ commercial real estate markets generally continued to improve. Vacancy rates fell in the San Francisco, Minneapolis, New York, Dallas, Richmond, and Kansas City Districts. Chicago reported a more mixed picture, with some areas of the District expanding but activity in the city of Chicago flat. Largely because of lower vacancy rates, rents rose in San Francisco and New York, while previous concessions were reduced or eliminated in Dallas. New construction activity was reported to be increasing in the San Francisco, Minneapolis, St. Louis, Atlanta, and Cleveland Districts, and many contacts expect this trend to continue in 2006.

Tags: Hurricane, Beige Book

Comments Off on Beige Turns Orange: Economy Expands at the end of 2005

In Carl Bialik’s The Numbers Guy Column [The Numbers Behind the Transit Strike [WSJ]](http://online.wsj.com/public/article/SB113510450446327616.html?mod=2_1125_1) he discusses the numbers thrown around relating to the economic damage to the city.

“Ms. Van Wagner, an economist, and her agency’s (office of comptroller) chief economist reported that a strike could cost the city $400 million in economic activity on Tuesday and $300 million on subsequent weekdays this week, as city residents miss work and shoppers can’t reach stores. The price tag for the weekend, should the strike last that long, is estimated at $100 million total for both days, because less business gets done on weekends, and the economists expect the Jewish and Christian holidays to slow business even more than usual.”

“New York’s Economic Development Corporation put its estimate for lost economic activity higher, at $440 million to $660 million per day.”

Mayor Bloomberg has been using $400M.

Other economists call these estimates very high. In 1980 during the last strike, the estimates ran at about $100M per day.

The media has reported $400M to $660M per day damages.

I know its costing businesses something. Many of my employees can not make it in to work or arrive late or have left early. Appointments and potential business meetings were canceled. Some have telecommuted.

Has this affected the real estate market? Not really. Brokers and their clients are winding down their activities about now anyway. The wild card here is how long the strike will last but I remain skeptical that even an 11-day strike like the city saw in 1980 would have a measurable affect on the real estate market.

However, on the bright side, it does give us something to complain about.

Comments Off on Sing: On The Second Day Of The Transit Strike The Numbers Told To Me….

[The Federal Reserve released its anecdotal analysis of the overall economy this week [Bloomberg].](http://www.bloomberg.com/apps/news?pid=71000001&refer=top_world_news&sid=aCfSONSuZ2BY) It is the first report completed since the double hurricane barrage of bad fortune in September.

The housing market, while remaining ‘generally strong,’ showed more signs of cooling in other areas, the survey said. The New York and Boston districts said homes were sitting on the market longer, while inventories of homes for sale increased in the Chicago and Kansas City regions. Demand for office, retail or industrial real estate increased in all areas, the Fed said.

[Residential real estate activity remained generally strong, but reports that demand for homes has eased have become somewhat more common. [Beige Book]](http://www.federalreserve.gov/FOMC/BeigeBook/2005/20051019/default.htm)

The Fed intends to continue raising short term rates at a “measured pace.” Immediately after the hurricanes, it was generally thought that the Fed may ease in its attempts to reign in inflation as the economy felt the drag of hurricanes. However, this was short lived. Rising wages and gasoline prices continue to raise inflationary concerns.

As a result, mortgage rates have continued to trend upward.

The next Beige Book is scheduled for release on November 30, 2005.

Tags: Hurricane, Beige Book

Comments Off on Beige Book: Despite Storm Of Bad News, Real Estate Economy Remained Generally Strong

John Waski, a columnist from Bloomberg News, suggests changes to the tax code proposed by the president’s Advisory Panel on Tax Reform [could dampen the housing boom.](http://www.bloomberg.com/apps/news?pid=71000001&refer=columnist_wasik&sid=a212fBH5SQqc)

[In commentary by Andrew Cassel of the Philadelphia Inquirer](http://www.philly.com/mld/inquirer/business/12938592.htm?template=contentModules/printstory.jsp) he argues that this is the moment of truth for the housing market if the US tax code is modified, disallowing the mortgage interest deduction.

Actually the original intention of the revision of the code wasn’t the home mortgage deduction at, but rather the [Alternative Minimum Tax or AMT](http://www.smartmoney.com/print/index.cfm?printcontent=/tax/filing/index.cfm?story=amt) which was designed to prevent the richest taxpayers from getting away without paying any tax. The AMT a separate tax system with many complicated rules. One of the objectives of the president’s panel was to make recommendations to simplify the tax system and make up for the shortfall with the elimination of the AMT. Because it was not indexed for inflation, many middle class Americans now pay the tax.

All recommendations of the panel had to be “tax neutral”, not adding to the federal deficit. One of the easiest targets is the home mortgage deduction because it is so large. According to the Mortgage Bankers Association, it would mainly affect homes costing over $438,000. Since these homes tend to be located on the east and west coasts, the reform is not “geographically neutral.”

The problem with eliminating this deduction is that it is one of the largest financial incentives to buy a home and it is built into the price structure of all homes and the economy that surrounds it. Changing the rules late in the game affects the pocketbooks of 70% of Americans who own homes (who all vote, by the way) so I would [expect a fight [Washington Post]](http://www.washingtonpost.com/wp-dyn/content/article/2005/10/19/AR2005101900196.html) if the recommendation is endorsed by the administration.

Most homeowners likely purchased with the idea that this deduction was a core right of homeownership. The president has the lowest approval rating of his tenure, so acceptance of these proposals are not a sure thing. Since housing is a significant component of the economy, and the mortgage tax deduction is inherent in its structure, things could get ugly.

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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

A recent article by columnist Chet Courier at Bloomberg News asks the question: [Is now a good time?](http://www.bloomberg.com/apps/news?pid=71000001&refer=columnist_currier&sid=a32uOlIM54E4) Like the stock market, there are people who are convinced that the market is at the top and its now time to sell. Mr. Courier provides a lot of common sense for that question, “Is now a good time to sell?”

Media coverage has been full of get-rich quick stories and seemingly no-lose scenarios.

Yet the costs associated with selling are high and the transaction can be complex. Simply put, real estate is a lot less liquid than stocks. There are a lot of stories and assumptions made about market timers, those that have made fortunes selling at the right moment, but much of that is overblown or exagerated.

Likewise, homeowners could tie themselves in knots trying to decide when the absolute top of the market for their properties will be seen. The best time to sell, or buy, a house may be whenever you are ready to move.

1 Comment

Approximately 85% all residential home sales are existing homes. The large sample size makes the monthly NAR report representative of the country’s housing market as a whole than then new home sale stats released by the US Commerce Department tomorrow. However, existing home sales are based on closings so it lags the current market while new home sales are measured at time of contract.

The housing market has been the main driver of the U.S. economy this decade, accounting for 50 percent of the overall growth and more than half of the private payroll jobs created since 2001, Merrill Lynch said in a report on Aug. 15.

[Today the NAR released their existing home sale statistics for August and the sesults were quite robust [Bloomberg].](http://www.bloomberg.com/apps/news?pid=10000103&sid=aqBcCYhz5OZI&refer=us) The number of sales for August increased 2% over the prior month and 7.8% over the prior year suggesting that the rate of existing home sales has increased this summer.

The median sales price of of a US existing home was $220,000, a record. It was up 15.8% from the prior year.

The NAR expects housing demand to continue to increase due to the Hurricane Katrina. The cleanup will provide a drag on the economy keeping mortgage rates low, the primary driver of the current high level of sales volume. Steady job creation, easy access to financing have kept demand high.

The results were somewhat of surprise given the traditionally slow summer months and the concerned positioning the Fed has taken on the housing market this summer. However, these statistics do not reflect the August market due to the delay between contract and closing date.

Tags: Hurricane Katrina, NAR, National Association of Realtors

1 Comment

[The University of Michigan Consumer Sentiment Index](http://quote.bloomberg.com/apps/news?pid=10000006&sid=aeRCxhyP9B.4&refer=home) fell to its lowest level since 1992, below post-9/11. The drop was attributed to the [Hurricane Katrina ravaged Gulf Coast region and record gasoline prices [Subsc.]](http://online.wsj.com/article/0,,SB112687305010742854,00-search.html?KEYWORDS=housing&COLLECTION=wsjie/archive)

[Retail sales fell 2.1% in August [Subsc.]](http://www.marketwatch.com/news/story.asp?dist=nwtam&param=archive&siteid=mktw&guid=%7BE2D5F2BC%2DE871%2D48BB%2DB513%2D6009DB1E5E2A%7D&garden=&minisite=), the largest decline in 4 years. Auto sales fell 12%.

Despite the spike in gasoline prices, the drop in retail sales and auto sales and flat core inflation, the Fed still sees that inflation is still a threat. At what point will the bond market come on board? These factors can also make the argument that we are near an economic slowdown and inflation is not a threat. Raising short term rates could further weaken the economy. All this could bode well for mortgage rates if economic conditions remain the same.

The Fed is expected to raise the federal funds rate on Tuesday because it believes the economic malaise that seems to be gaining momentum, is temporary. The bond market seems to agree, seeing a slight 0.01% uptick in mortgage rates over the past two weeks.

Tags: Hurricane, Hurricane Katrina

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It seems that whenever pundits, experts or commentators are asked about whether there is a housing bubble, the answer is given short shrift and invariably contains one of two phrases:

The housing market has a solid foundation

[[RISMedia]](http://www.rismedia.com/index.php/article/articleview/11740/1/1/)
[[The Real Deal]](http://www.therealdeal.net/issues/SEPTEMBER_2005/1125419264.php)
[[Newswire]](http://www.newswire.ca/en/releases/archive/April2005/27/c0755.html)
[[Vermont Guardian]](http://www.vermontguardian.com/local/0904/HomePrices.shtml)

The housing market has a stong fundamentals

[[Bloomberg]](http://quote.bloomberg.com/apps/news?pid=10000006&sid=agkeb7H.i72M&refer=home)
[[Originator Times]](http://originatortimes.com/content/templates/standard.aspx?articleid=1462&zoneid=5)
[[Pittsburgh Tribune-Review]](http://pittsburghlive.com/x/tribune-review/trib/newssummary/s_364567.html)

These or similar phrases are taken at face value, yet little discussion time is spent on what actually constitutes a solid foundation or strong fundamentals for the housing market. Maybe its really not that complicated after all.

Comments Off on Repeat After Me: Solid Foundation, Strong Fundamentals

Greenspan said today that the US housing boom is sure to end eventually and there should be a drop in home prices.

[Webmaster’s Note: I’m am fairly certain most people do not believe the housing boom will go on forever so tell us something we don’t know.]

A weakened housing market would take the punch out of an inflation threat and therefore the pressure off the Fed to keep raising short term rates. Consumer spending is reported to account for 70% of the US economy and this driven largely by the ability to tap home equity.

To date, some US economists believe the [“wealth effect” of housing](http://matrix.millersamuel.com/?p=62) are offsetting the [negative influence of rising oil prices. [Note: Paid Subcr.]](http://www.realestatejournal.com/columnists/housetalk/20050826-fletcher.html?rejpartner=mktw) [The ability to pull equity out of the housing sector has helped consumers maintain discretionary spending despite rising oil prices.](http://home.nzcity.co.nz/news/default.asp?id=54345&cat=1052)

[Besides rising oil prices, labor costs are expected to rise](http://quote.bloomberg.com/apps/news?pid=10000103&sid=aXYJrQPCX40w&refer=news_index) keeping pressure on the Fed to raise short term rates.

The Fed believes that home prices will continue at their brisk pace through the third quarter, [before easing in the final quarter of the year.](http://futures.fxstreet.com/Futures/news/afx/singleNew.asp?menu=latestnews&pv_noticia=1125094993-e04f0f08-38013)

[Here’s a great article written last May called “Don’t Buy Housing Bubble Propaganda”](http://biz.yahoo.com/ts/050526/10225437.html?.v=3) by the webmaster of one of the best economic blogs out there: [Big Picture](http://bigpicture.typepad.com/)

The author discusses mortgage rates and changing demographics better than any article I have read on this topic. One item of particular interest: More than 80% of all stock purchases are speculative. [According to the NAR](http://www.realtor.com), housing is currently at 23% which seems to pale in comparison, doesn’t it?

Tags: Alan Greenspan, Realtor.com, NAR, National Association of Realtors

Comments Off on With Oil In The Mix, Asset Prices Are Expected To Simmer Down

[Greenspan spoke this week at symposium](http://www.federalreserve.gov/boarddocs/speeches/2005/20050826/default.htm), held in Jackson Hole, Wyoming, sponsored by the Federal Reserve on the legacy of his 18 year era. He took the position that the housing market now suffers an imbalance.

The Federal Reserve is paying closer attention to the rising values of assets such as stocks, bonds and homes, as low interest rates encourage more risk-taking, Fed Chairman Alan Greenspan said.

Low “Risk Premiums” (A new mantra?) [This trend reflects what Mr. Greenspan said was the increased willingness of investors to accept low “risk premiums, a willingness based on a complacent assumption that the low interest rates, low inflation and strong growth of recent years are likely to be permanent.”](http://www.nytimes.com/2005/08/27/business/27greenspan.html?ei=5094&en=60523b369c61a0fa&hp=&ex=1125115200&partner=homepage&pagewanted=print)

His concern is when (bond) investors become more cautious, yields will rise, lowering housing values and then selloff of bonds that caused rates to drop in the first place. “This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.”

Other notable Greenspan-speak, etched in the public conscience are:

[A Conundrum – ](http://www.boston.com/business/globe/articles/2005/06/07/greenspan_cant_explain_interest_rate_conundrum?mode=PF) [An inverted yield curve appears to loom on the horizon.](http://matrix.millersamuel.com/?p=82)

[A Frothy Housing Market – ](http://www.businessweek.com/bwdaily/dnflash/jul2005/nf20050721_0075_db016.htm) [“The Fed feels it needs to squeeze more air out of the market – the housing market in particular, although the Fed has stressed that it’s not targeting housing with interest-rate policy.”](http://futures.fxstreet.com/Futures/news/afx/singleNew.asp?menu=latestnews&pv_noticia=1125087389-e04f0f08-36473)

[Irrational Exuberance – ](http://www.federalreserve.gov/boarddocs/speeches/1996/19961205.htm) Greenspan first used the phrase in 1996 several years before the stock market corrected in 2000 but it came to define the rapid run up in stocks in the 1990’s. The analysts that missed the dot com bubble now seem to be the ones warning us about the housing market boom’s eventual conversion to bust.

Tags: Alan Greenspan

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