Matrix Blog

This piece was taken from my new Forbes column. I’m testing the platform to spread the word and you can help me by going here and then clicking “follow.”

Keeping Housing Market Results From The Public Is Never Justified: An Expansive View

Transparency is always the right strategy

When the Covid-19 crisis began halfway through March, the Manhattan housing market was placed on “pause,” as were many housing markets around the country. New York State “Shelter in Place” rules prevented the in-person showing of a property by a real estate broker. That was the beginning of the problem this crisis posed for the industry that lives and dies on sales and rental transactions. Then a startup agent trade group (NYRAC), made up of some of the most productive agents in the market and includes many of my long-time industry friends, pushed to hide the days on market metric from the public for what turned out to be a self-serving reason. I love what they stand for, but this was a strategic error that I could not support.

While I have been a real estate appraiser and market analyst for 35 years, I dipped my toe into real estate as a sales agent in Chicagoland for six months in the mid-1980s.

Lesson learned

From my experience there it was clear to me that the accuracy of the information our office possessed was critical to all parties for the market to function. I still have my old monthly MLS books and remember logging on to the MLS from one ancient (even then) terminal in the office – talk about delayed market information!

Days on market during Covid-19

The days on market (DOM) metric is significant to sellers because they don’t want their home to be perceived as overpriced if it sits unsold too long. DOM can be measured in several ways, but the one I see used the most is the average number of days between the last price change, if any, and the contract date (or today’s date if it has not sold.) When a potential home buyer looks at a listing on a public-facing web site, they look at DOM as one way to determine whether the listing price is reasonable. The longer a listing sits on the market as compared to other listings, the more likely it is over-priced. Sellers look at DOM too and become concerned when their listing sits too long relative to the competition, typically blaming the agent for not marketing the property enough. However, the asking price is usually set by the seller who is slow to recalibrate their asking price if the market is weakening. I’ve found it takes one to two years for a typical seller to capitulate on price in a downturn and not feel like they left money on the table.

Hiding DOM as a marketing strategy

When the government ordered lockdown hit New York City, and real estate agents were not allowed to provide in-person showings, market activity immediately stalled. NYRAC pressured various platforms to hide DOM information from listings. They still wanted users to be able to drill down and uncover the details, but at first glance, the DOM information was to be hidden.

Streeteasy (owned by Zillow), the de-facto Manhattan multiple listing system in the eyes of the consumer, and the Real Estate Board of New York (REBNY), the leading real estate trade group with their own platform known as RLS, initially balked at the manipulation but eventually caved to NYRAC pressure. NYRAC made a strategic error that further damaged the long-term credibility of the real estate brokerage industry with the consumer. Not all brokers agreed with this strategy either, but this group placed enough pressure on these platforms to make the change happen.

Only sellers matter?

The incentive to “partially” hide DOM comes down to this:

1) Give the sellers a “break” after two years of softening price trends.

2) Address the sellers’ concerns about extended marketing times during the pandemic.

3) But the primary reason is that real estate brokers didn’t want to lose their listings if the sellers removed them from the market and returned to the market later with a new agent.

Why this effort was wrong

NYRAC and several real estate agents said to the effect, “the buyer or seller can still look at the listing history to know how long a listing has been on the market. That data was never removed.”

I always respond with “Then why hide it in the first place?” To brokers in favor of this temporary rule who wonder why I appear to be obsessing about a nuance I say, it is never appropriate to manipulate data, made even worse by the primary motivation behind this action.

Ignoring the buyers

This “solution” ignores the buyer’s position in a sales transaction and yet last time I checked, buyers are on the other side of every sale. Any effort to partially or fully hide DOM results or any other market metric conveys the wrong message and smacks of the old “information gatekeeper” mentality, no matter the state of the market.

Recently, the official word came down that all days between the shutdown and the reopening will count as “one day” for the DOM calculation presented to the public.

Going forward I have the following questions:

• Are we to anticipate a suspension of DOM anytime there is an unexpected external event that impacts the housing market (9/11, The Lehman Brothers bankruptcy, Super Storm Sandy)?

• Who makes the call to do this? A trade group, a regulatory body, a for-profit platform?

-Do we think that buyers and sellers of real estate are unaware of the 90+ day COVID-19 market shut down? Will a new listing added today as the market opens with 1 DOM will sell differently than an identical property with a 91 DOM listing that sat through the 90+ day COVID-19 lockdown?

The market doesn’t care what the brokerage community thinks (or what I think). The act of intentionally hiding or partially hiding data from the consumer is never justified in any scenario.

Tags: REBNY, Zillow, StreetEasy, COVID-19, NYRAC, transparancy

Comments Off on My Forbes Column: Keeping Housing Market Results From The Public Is Never Justified: An Expansive View

A few days ago I published a critical piece on the appraisal industry for Bloomberg View called Guess What’s Holding Back Housing.

There are many great people, incredible talents and solid organizations within the appraisal profession. But in my opinion only 20% of the industry are truly competent professionals and the remainder are merely varying degrees of form fillers.

I have been an appraiser for 28 years and it is apparent that the industry is dying a death of a thousand knives. One of the key reasons for this slow death is the lack of national leadership and the extreme fragmentation since most appraisal shops are comprised of a single or just a handful of professionals. I’d also like to offer that the majority of our profession seem very willing to make unsupported negative inferences on reviews of a colleague’s work such as appraisal field reviews or troll columns like mine.

Like I said, 80% of the profession are really not professional. Many of these appraisers have not looked up from their clipboards in quite a while and take an objective look at the world around them.

I have found appraisers throughout my career to be hyper defensive about the quality of their own work (I am definitely one of them on occasion). Just ask any bank review appraiser what it was like to call an appraiser out on an unsupported analysis. And just ask any appraiser what it is like to get meaningless criticisms from a bank appraisal reviewer over nothing germane to the value opinion.

A few week’s ago a colleague sent me a link to the first empirical study on the impact of HVCC on the appraisal profession by the Federal Reserve Bank of Philadelphia. The thrust of the study was the analysis of “low appraisals.”

When I used the term “low appraisals” in my piece combined with their editors choice of post titles: Guess What’s Holding Back Housing all bets were off.

It was “game on”, yet I’m in the appraisal trenches with all of them. The most amazing thing about the adverse reaction was that most of the appraisers who trolled the comment section or sent me scathing emails never read the Fed’s working paper on the analysis which was the basis of the post. The core of the working paper is only about 10 pages double spaced in length yet they were more willing to troll a colleague than undertake a professional debate.

I could chalk this unprofessional reaction to the battering our industry has taken over the past decade – I certainly feel that way – but it doesn’t explain everything. Because our industry has no real voice in related public policy, we continue to be marginalized by robotic institutional processes such as AMCs, AVMs and upper management that still sees our services as merely a cost center.

When I received the first email troll comment, I queried his email address and called him up right away. He was surprised that I found his phone number but we had a pleasant discussion. He was concerned that I would out him.

I exchanged emails with several of the email ranters and the replies were much more civil. I also did this with a few of the commenters on the post.

Although the majority of these responses are rambling rants, they shed some light on the state of the appraisal profession.

Take a look at a sample (I redacted their last names, firm names and contact info):

Hello Jonathan- I’ve heard good things about your firm and its work, so I am doubly shocked by the headline in your article “Guess What’s Holding Back Housing,” and the implication that somehow appraisers are to blame for the sluggish pace of the housing recovery. There’s no question mark at the end of the “Housing.” It’s not a question, but more of an accusation. You do know we’ve been through a severe recession, don’t you? That in spite of the increase in employment that has taken place we have created a lot of part-time jobs and done away with a lot of high-paying full-time jobs. Labor force participation is way down. You do know that lending standards have tightened? Are you aware of these facts? I ask that because your article conveys ZERO understanding of any of these fundamentals. The term “Low Appraisals” manages to be erroneous and stigmatizing at the same time. That an appraisal is “low” tells me nothing about the quality of the appraisal. It may be a great appraisal. It may be a terrible appraisal. It says nothing about whether the appraisal conforms to regulatory guidelines and industry standards and is a credible opinion of market value. I NEVER use that term when referring to an appraisal. I have dealt with many irate customers throughout the years and I always take the time to explain to people what an appraiser is supposed to do – which the general public frequently does not understand. The term “low appraisals” is also stigmatizing. If “low” appraisals are “holding back housing,” well that is not a good thing, is it? As a leader in an industry which is poorly understood by the general public, I am saddened that you would take the space granted to you to further the misconceptions people have about appraisers and what we do. It is NOT our job to “make” or “hit” a number. When we make that the job is when the problems start happening. You could have explained to Bloomberg’s readers that appraisers have to weigh an offer for a property in light of market evidence. If the evidence to support the sale price is not there, an appraiser is doing his or her job in NOT “hitting the number.” Your use of the “low appraisal” term suggests that the appraisal is somehow flawed. If the appraisal is flawed, it is not because it is “low” but because it does not incorporate appropriate data and/or analysis. In all my time in the appraisal industry I have always offered irate clients a change to point to specific, substantive errors or omissions in any appraisal when they do not agree with its findings. The overwhelming majority of the time the client, or broker, or other interested party has nothing to say. They are angry because the number is “too low.” They don’t know or care if the appraisal is well done or poorly done. All they care about is that it is “low.” I hope you will use your prominent position in the industry and your access to publications such as Bloomberg to speak the truth about what appraisers are do, not further misconceptions. Sincerely William

I called William directly and we spoke at length.

How can you, a highly recognized real estate appraiser, write an article for Bloomberg suggesting that appraisers are partially responsible for the weak housing market when the quality of the appraisal reports was not analyzed? How can anyone, or an agency make such a suggestion if the reports weren’t analyzed? I am a retired general real estate appraiser who reviewed many reports and to do so required a knowledge of the real estate market in which the report was prepared. In my own opinion, again without an analysis of any reports, it is more likely that the appraisers are better now and are NOT trying to hit the target as was the case prior to the 2006, 2007 blowup because they are under so much scrutiny from the lenders. For example, no more calling an average property “above average with no repairs necessary” when, in fact, the property has a few problems. The local appraiser group has shrunk as the worst ones are no longer in business, as is the case of many of the unscrupulous lenders who employed them.

My response to the above:

Hi Thomas,

Thanks for sending the note.

It’s actually quite easy to write about it. I disagree with your observations about today’s quality. It is very poor.

I have reviewed thousands of residential appraisals, been an expert in a number of national litigation cases and the quality right now is just as bad as it was during the boom, but different. The Fed study I referred to in the piece inferred a quality problem as a result of the metrics presented. Talented professionals like I’m sure you were are no longer entering the industry.

Yes the mortgage broker-orientated appraisers are largely gone now but the new generation of appraisers working for AMCs are just as bad, but in the opposite direction. Now we have an industry working for half the market rate who need to cut corners to be able to complete the report. With AMC’s it is much more common for the appraiser to be missing local market knowledge and to drive much farther to their assignment.

Mortgage appraisers today who work for AMCs tend to be biased low because they don’t know their market area cold which is just as bad as being biased high back during the boom.

I want our industry to provide a neutral well research product. The problem is the the clients don’t care and see us as a commodity rather than a profession.

Again, thanks for sharing your thoughts.

Thomas did not respond.

Jonathan, Summarized: Appraisers were responsible for the housing bust AND now for holding back progress in the housing market. Funny how that is……..that so many cover the above as truth and that few actually write about the actual purpose of the appraisal process. I suppose it would be harder to headline an article like that and draw readers in. I enjoyed this part in particular; “The quality of appraisal reports wasn’t analyzed, but the paper suggests that it may have declined.” I look forward to reading more. Sincerely, Adam

My response to Adam:

Hi Adam

Summarized: you need to drop the righteous indignation lathered in sarcasm approach. It’s not productive unless you are merely a troll.

Otherwise I assume you are an accomplished appraiser. Would you like to discuss this tomorrow? I’d really appreciate dissecting the disconnect.

Let me know.

Adam did not respond. The more sarcastic the commentary, the more afraid appraisers like Adam are to engage in reasonable discussion.

I don’t think you have all the correct information. For only a $400 to $500 fee an appraiser will make sure I don’t pay too much for a house. Nor pay the real estate agent a 7% commission which on a $500,000 home would be $35,000. Nor pay $300,000 in interest to a mortgage company. So are “low ball” appraisals really the problem? Or were “inflated values” the problem? Or is it that appraisers keep the other guy honest? Sorry sir, but I want to not get ripped off! Bobby

My reply:

Bobby

Thanks for the reply. On a bank appraisal, the appraiser’s client is the bank, not the borrower – a common misunderstanding.

We had a continuing dialogue.

I just read the article on Bloomberg View and I have to say, as a certified real estate appraiser, I am a little offended. I know the graphs and the statistics show that there has been an increase of real estate sales and refinances that are killed by the appraisal. I also agree that the HVCC and later the Dodd-Frank Act has increased the number of what are called “low appraisals”. I think the problem myself and many other appraisers have is even the often incorrect use of the phrase “low appraisal” itself. As in all professions there are always going to be the few that don’t do the job correctly or even those who falsely skew the results. The other 98% of the appraisers out there are just giving the honest truth, as we are required to by our ethics and the law. Most appraisers including myself have a great respect for the fact that we are there to protect the borrower and the lender, or the seller and the buyer in the case of a sale. I have read many articles in realtor or mortgage professional trade magazines and online blogs about these “low appraisals” and the bad “low ball appraisers”. The story often goes like this; A realtor Jane Doe describes how “bad, low appraisals” have killed 4 of her last 10 sales. She says the problem has gotten worse and she has been a realtor for 20 years and appraisal quality is at an all time low. The truth is that most agents, like appraisers are honest professionals who are doing a good job. The issue is their job is to get a buyer and seller to agree on a price… so that they get what they want and money can be made. They are advocates for “brokering” the deal and work on commission. There are few checks and balances in that system, it is self regulated by the free market, which is great… most of the time. What sometimes happens is this: The house for sale is a nice 2,000 sf, 3 bed 2 bath ranch home in Niceville Subdivision, the seller feels his house is worth at least $250,000 and the buyer loves the house and they feel that $240,000 is the highest they can pay. The house goes under contract for $240,000 and 2 agents and 2 clients are happy… for now. Then when the appraisal comes back at $225,000 everyone thinks it is a low appraisal, 2 agents, 2 clients, 1 loan officer, etc. all want the house to be worth the agreed upon $240,000. The problem is the appraiser is doing his job and found that out of 30 total sales in Niceville S/D, 8 of them are similar ranch style homes that are in “average” to “very good” condition selling between $190,000 and $220,000. Most of the ones that best match the size, condition, # of garages, amenities, etc. have sold for about $215,000 after + & – adjustments are made for differences. That is what is known as “The MOST PROBABLE PRICE a property will bring in a competitive and open market”, not the highest price “if you get lucky”, or the price you can get “if the buyers are from out of town and don’t know the local market”. The scope of work we agree to is just that, the most probable price. Lenders want to know that if the loan stops performing that they actually own something that is worth what they lent on it. If 90% of homes like the one in this case sell for $215,000 and I value it for $240,000 I have not done my job correctly. If the loan defaults 6 months later when the buyer losses his job and the bank loses money because they can’t find that rare buyer willing to pay too much, I have harmed them. If the buyer of that house gets relocated in 6 months and cannot sell it or has to take a loss when he realizes he can only get the usual $215,000, I have harmed him. The agents and loan officers that made the high commissions 6 months ago have nothing to fear, they did their job and got the deal done. The appraiser will be the one that will be getting the call from the attorneys. That is something that needs to be remembered. We are NOT paid on commission and our work is scrutinized by underwriters to test us constantly. It is in our best interest to do the right thing and value a property fairly, not too high or too low…. And that is what we do…. and get pressure in one direction or the other if values are going up or going down. That is why the average age appraiser is over 55 years old and few are joining the profession. Being a punching bag for doing the right thing gets old as fees go down gobbled up by the AMC’s that Cuomo forced on the industry as the cost of living, gas, business expenses, insurance, etc. goes up. P.S. Look at Cuomo’s involvement and gain, in creating a forced middleman in the modern appraisal industry. Regards, John

Thanks for your thoughtful reply John.

The phrase “low appraisal” was the metric selected by the Fed and the basis of the study. It strikes a nerve in appraisers and rightful so. They used it in a mechanical way versus the way NAR might complain that appraisers are killing their deals. Still, the appraisal quality of the industry is worse today compared to 10-20 years ago. Are there good appraisers out there? Of course. I am. You sound like you are. But the industry is dying and part of the reason, but not the entire reason, is us. We have no leadership and are simply being marginalized – the outcome in my opinion is a lower quality product that reduces the reliance on our industry.

Thanks again for sharing your thoughts.

John replied again with a very well articulated description of the state of the appraisal industry.

I agree that we need to do more. In Louisiana we are pretty good about regulating AMC’s and there is a requirement for them to pay C&R fees but many still don’t. I am sorry if I sounded rude in my first e-mail but as you know the low appraisal thing strikes a nerve with most of us. I would love to see a large powerful national organization that truly advocates for appraisers the way NAR does for realtors. That would be the real answer. Getting most of us in one organization I agree is the problem since we are lone wolves in many ways.

Tags: Trolls

38 Comments

I was recently approached by Bloomberg View, the editorial arm of Bloomberg LP, to provide commentary on the housing market. I seem to be in good company.

Although their well oiled machine began to append my additional title “Bloomberg Contributor” earlier in the month when being sourced, it wasn’t an oversight on their part. I didn’t submit my first post until last week. It took me a few weeks to get my groove on as I was in the midst of a 2Q14 market report release gauntlet.

Last Wednesday evening I wrote my first post about Lawrence Yun’s attendance at the Zillow Housing Forum and how NAR had become just one of the crowd, and the symbolism of it all. I got the idea when I was sent the Zillow e-vite to attend the conference and I noticed that Yun was to speak.

Excited, I submitted my first post on Thursday morning, unfortunately just before the Zillow-Trulia bombshell deal jumped into the headlines. So I needed to add this new twist – which thankfully made my original point even stronger. I re-wrote my first post and it was placed online last Friday.

Here is the first column of hopefully many to come: Homebuying Gets a Housecleaning

My Bloomberg View RSS feed.

Tags: Zillow, Lawrence Yun, NAR, National Association of Realtors

Comments Off on My First Post on Bloomberg View: Homebuying Gets a Housecleaning

With big swings in housing related trends over the past decade, long term patterns are called into question. When a long term trend seemingly changes direction, it is reasonable to point it out. As I opined previously, the housing industry often defaults to linear thinking. It’s not enough to point out a trend, it is better to proclaim that the trend will run indefinitely because consumer tastes have changed.

Here are a few examples of trends in the US housing market that are not trends:

Average New Home Sale Size

[click to expand]

When the housing bubble popped in 2006, shortly after it was pronounced that the multi-decades long trend would reverse it self. Yet the change was a purely short term economic shift as the entry level surged with the sharp decline in mortgage rates. After a few years, the trend of expanding sizes resumed. I’m not saying that the trend will run indefinitely larger, but it is important to look at why the average square foot began to fall in the first place. A harsh economic condition with a rapid rise in affordability prompted in a shift in the mix. And remember, this highly referenced metric reflects new homes which is only about 15% of normalized housing sales.

Here is the housing conversation on home sizes from 2007-2011.

Home Ownership

[click to expand]

Perhaps one of the largest misinterpretations of consumer trends has been on the subject of homeownership. As is evident in the chart, the heavily documented push to higher homeownership played was a sudden burst rather than a long term gradual change. The surge in the trend was artificial, based on fraud and unsustainably loose credit conditions that where based on NOTHING. With the multiyear decline, we are beating ourselves up over the decline in the homeownership rate yet we are reverting to the mean since credit is unusually tight. In fact the median homeownership rate of 64.8 over the past 49 years is exactly where we are right now in 1Q14. Will the market overcorrect towards rental? Yes I believe it will until tight credit conditions resume to more historic norms.

Here’s terrific takedown of the homeownership metric by Jed Kolko, Chief Economist at Trulia.

Will the US become a nation of renters and micro-houses? If one makes those arguments out over the long term, I don’t know what compelling information those trends would be based on.

Tags: Square Footage, home ownership

Comments Off on Trends in Home Size and Home Ownership React to Economic Conditions, Not Taste

Joe Weisenthal, Executive Editor of Business Insider, pronounced we’re at “Peak Anti-Homeownership” after reading Barry Ritholtz’ Bloomberg View piece on homeownership a few weeks ago.

Seems like we're at peak anti-homeownership. Good piece by @ritholtz http://t.co/h5SzLyacBt

— Joseph Weisenthal (@TheStalwart) May 7, 2014

If financial journalists and housing pundits today truly reflect the US sentiment about housing and homeownership, then we’re clearly manic about our largest asset class.

The conversation by a number of financial journalists and a particular Nobel Prize winning economist has morphed into a homeownership-is-a-false-aspiration pronouncement, almost entirely supported by treating this asset class as a stock. Didn’t we learn the hard way that this was flawed thinking during the prior boom? And unless I’m mistaken, the majority of US homebuyers, aside from investors, used leverage for much of the last 50 years. How about we estimate the ROI on what real people actually do and stop thinking about homeownership as a stock transaction? Good grief.

2012-2013 – Last year’s housing market “recovery” pronouncement was based on nothing fundamental, merely Fed policy of QE and years of pent-up demand released after the “fiscal cliff” came and went without a major catastrophe. Pundits caught up in the price euphoria said the housing market was firing on all cylinders. Yet surging price growth was largely based on sales mix-shifting, less distressed sale buying, tight credit causing, lack of inventory inducing, fear of rate rising, double-digit price growth. Positive housing news was refreshing news to many, but there was nothing fundamental driving the market’s performance to such incredible rates of growth. I couldn’t wrap my arms around 13% price growth with tight credit, stagnant income growth and unacceptably high under-unemployment as economic fundamentals.

2014 – This year’s housing market, which is being compared to the year ago frenzy, is showing weaker results. The housing recovery “stall” is being blamed on the weather, falling affordability and weaker first time buyer activity. This has brought some in the financial media to conclude that homeownership is over rated.

An aside about the weather – a homebuyer last January didn’t say “Gee, since it is 0 degrees outside, let’s cancel our appointment with the real estate agent and delay our home buying plans for 5 years.” Of course not – the harsh weather merely delayed the market for a month or two. However since it hasn’t “sprung back” yet, then clearly there is something else going on besides the weather.

Falling homeownership and anemic household formation is the result of a lackluster economy and a global credit crisis hangover. I can’t make the connection how these weaker metrics have anything to do with a flaw in the homeownership aspiration. Homeownership is falling because it rose to artificial highs (Fannie Mae was shooting for 75% during the housing boom) and is now overcorrecting because credit is unusually tight, the byproduct of a lackluster economy, the legacy of terrible lending decisions and fear over additional forced buybacks of flawed mortgages among other reasons.

I’m quite confident that a significant, sustained economic recovery will go a long way to ease credit conditions and eventually revert homeownership to the mean and we can stop with the “cart before the horse” orientation. While homeownership has never been right for everyone, recent calls that it’s not right for anybody is just as flawed.

Then we’ll pronounce “Peak-Homeownership” in our own manic way.

Tags: Robert Shiller, Barry Ritholtz, Business Insider, Joe Weisenthal, John Burns, peak

9 Comments

I took the photo of this door in NYS Supreme Court yesterday and it got me thinking about quality of “experts” as did this.

In a perfect world, any appraiser or analyst (in any profession) should be forced to provide expert witness testimony in court at least once – covering a paper they’ve written, research they have presented, an opinion they’ve formed, a sales pitch they’ve developed, heck even a blog post they’ve posted.

I actually like providing testimony and our firm does a fair amount of this work for our clients. Getting grilled for hours and even days by lawyers trying only to chip away at your credibility in front of others provides amazing clarity to the way you approach your analysis and profession (aside from being exhausting).

Many talking heads that opine on a housing market, a stock, a court case, etc. often aren’t tested to fully articulate their thoughts, assuming they are even thinking. Hence, BS reigns.

Tags: expert, testimony, expert witness, court

1 Comment

[Source: WSJ, click to expand]

Roughly 90% of the residential market has passed through Fannie and Freddie since the onset of the financial crisis. Reliance on these institutions was only around 50% before the crisis – and are they making a lot of money for the federal government right now. I’ll leave out the part where FHA stepped in to pick up the high risk slack. The private secondary mortgage market was obliterated by the credit crunch/housing crash and in the half decade that has passed, investors are just now dipping their toes in the water.

There is a great summary piece by Nick Timiraos at WSJ: “What Can Take the Place of Fannie and Freddie” on the proposed Fannie and Freddie “overhaul.”

Big Dumb Banks
As my friend Barry Ritholtz over at Big Picture once told me that the former GSEs are merely “Big Dumb Banks.” In other words, they do as they were told.

Swapping them with another alphabet soup named agency doesn’t solve the problem. In fact, I contend that replacing Fannie and Freddie completely would likely create more problems since little if anything has been done to reduce the systemic risks that nearly brought down the financial system – and whose impact are still being felt by most Americans today.

If we can agree that Fannie and Freddie created a stable mortgage market environment for decades (Fannie since the Depression and Freddie since the 1960s) and then blew up in the recent decade or more (problems began back in late 1990s), there are clearly other issues in play. I’ve always seen Fannie and Freddie as the symptom not the cause of our current economic problems.

Fixing the symptom may make some feel better, but it does nothing to reduce the probability of a systemic credit collapse. The bailout of the GSEs was a result of policy from Washington – the congress, the executive branch and both political parties who in various ways encouraged proactive neutering of regulatory powers, allowed the revolving doors of regulators with Wall Street, allowing Wall Street to compete directly with commercial banks with mind boggling leverage, limited separation of competing interests (ie rating agencies and investment banks) and incentivizing a shifting culture to serve the shareholders over the taxpayers.

I suspect that last point is the impetus for this bi-partisan proposal – reduce the risk exposure to the taxpayer by getting the private market to take over. Congress clearly has an image problem that it is trying to fix as of late (until mid-terms).

Setting Standards to Follow
One of the under appreciated functions of Fannie Mae and to a lesser degree Freddie Mac, was to serve as the leader to the private mortgage market. When Fannie Mae adopted a standard or policy, the private market (ie jumbo mortgage investors), followed their lead. With Fannie and Freddie floating in limbo with a potential looming overhaul, it’s hard to imagine a robust private market developing anytime soon. This would be a completely new institution that would replace and reinvent the former GSEs, you simply invite anywhere from chaos to uncertainty into the financial system and instability to the housing market, a key economic engine for the economy.

The whole plumbing of the mortgage market runs through these companies. You can’t just take these things away without having a very clear and specific view about what’s going to replace them,” said Daniel Mudd, Fannie’s former chief executive, in an interview last year.

No real alternative to the system has been proposed that I’m aware of and this is really window dressing to show bi-partisanship in Washington. There is no time frame proposed and very little details to reinvent the secondary mortgage market have been brought forward.

Here’s a great podcast from WNYC called “Money Talking” featuring Heidi Moore and Joe Nocera covering the proposal.

Key Issues to Fix
The WSJ piece summarizes the key issues that need to be address quite succinctly:

• Make the “implied” guarantee explicit and require any successors to Fannie and Freddie to pay a fee for that guarantee.
• Get rid of those investment portfolios, or shrink them to the point where they don’t create systemic risks.
• Require more capital and tighter regulation, since too little of both is what got Fannie and Freddie into trouble.

The trouble is, the solution to over-reliance on Fannie and Freddie is too complex for Congress to solve in this era of gridlock. Record revenue being generated by the former GSEs make long term solutions unobtainable for now. I don’t see how any major changes can be inserted into the financial systems for a long time.

Tags: Fannie Mae, Barry Ritholtz, GSE, Big Picture Blog, Nick Timiraos, WSJ, Freddie Mac

Comments Off on The Bi-Partisan Fannie and Freddie Solution That Isn’t A Fix

I saw an opinion piece written about appraisal management companies over at HousingWire that made me just about fall out of my chair – and my office chair is a sturdy Herman Miller Aeron so it was quite an unsettling piece. I’ve written about AMCs quite a bit since HVCC came into effect on May 1, 2009 and my last big piece: “Appraising for AMCs Can Be Like Delivering Pizza” prompted a senior executive at one of the largest US AMCs – who we don’t work for – to call me after he read it and say, “all of what you wrote is true – how do we change it?” He sounded very reasonable and earnest and got his Chief Appraiser to reach out to me to explore what to do. That person ended up providing me with robotic and defensive feedback before I even asked any questions – making it clear it was all about keeping his job, not improving the industry. Sad.

Make no mistake – I am not against the concept of AMCs and there are some reasonable ones to deal with – but the majority of them are poorly managed and therefore can only attract appraisers with the “form-filler” mentality.

This HousingWire editorial was called “It’s time to debunk the 3 biggest myths about your AMC” by the CEO of an appraisal management company. We don’t work with them and I don’t know of them or the author. It’s a corporate sounding piece so I’m guessing that it was pitched and written by their PR firm as a way to sell the virtues of a good appraisal management company.

What threw me for a loop was the omission of any discussion about the actual providers of valuation expertise. AMCs do not provide value opinions to banks. AMCs manage appraisers who provide value opinions to banks. My guess is they or the AMC industry in general are receiving more pressure from banks for the rising cost of the appraisal process – not because the appraisal fees are rising – but because the AMC appraisal quality is so poor that relative to the cost, the value-add of an AMC really isn’t really there.

We have started to observe national lenders push back against the poor quality of AMC appraisals and some lender personnel are now bypassing AMCs on complex or luxury properties because they don’t trust the expertise coming out of the AMC. Amazing.

Here are the 3 “myths” presented in this AMC PR piece. I restate each point being made to reflect the reality of the appraisal process:

From the Housingwire guest editorial:

THEIR Myth 1: Appraisal Management Companies add costs to the lender’s business.

So, yes, the costs of putting a solid value on a piece of real estate have gone up. But this is not due to the fact that an AMC has been added to the equation. It’s due to the fact that it costs more to do it right, to employ the technology, to manage the fee panels, to quality-check the results. Like most myths, this one has at its core the ugly truth that the price of an appraisal has gone up between $80 and $200, depending upon the circumstances.

MY Opinion of Myth 1: The rise in costs is NOT because appraisers are arbitrarily raising their fees. It is because the appraisal management industry takes half of the appraisers fee paid by the borrower at application to cover their costs and ended up driving most good appraisers out of retail bank appraisal work – now dominated by AMCs. The rising costs are being born by the AMCs who try to checklist away the poor quality. Here’s how: Imagine making a modest salary for a job well done and then one day (May 1, 2009) you get your pay cut in half. The middleman between the bank and the appraisers (the AMCs) got to keep the other half of the appraiser’s fee/salary. In reality, this 50% pay cut was the appraiser paying for bank compliance with HVCC by hiring the AMC. Would you quit your job if you got a 50% pay cut? Most would say yes. Who would replace you at 50% of an already modest wage? A lower caliber, lesser experienced person who was able to cut corners – like eliminate research – and essentially be willing to be a form filler rather than a valuation expert – quality evaporates not matter how much “review” is put in place. AMCs have been grappling with poor quality and probably have had to increase oversight as more banks push back against the poor quality. I think the additional compliance issues being touted throughout this opinion piece in this “Myth” are probably more of a scare or fogging tactic than a real reason for higher costs. The higher cost that is being represented by the AMC is more likely from the fact that AMCs are being forced to find better appraisers in certain markets and those appraisers are less willing to subsidize bank compliance with HVCC out of their own hide. We doing more and more AMC work now and we are paid a full fee and are given a fairly reasonable turnaround time. Why? Because that AMC’s panel quality was poor and their bank clients basically told the AMC to use firms like mine or the bank will go to another AMC who will use a higher caliber of appraiser.

THEIR Myth 2: AMCs deliver poor turnaround times that can’t compare to internal teams

Anyone who buys into this myth must live in a world without Service Level Agreements (SLAs) that spell out exactly what a vendor will provide to a lender. It sets the terms of the engagement and specifies penalties that the vendor will suffer should it fail to live up to the promises the document holds. Turnaround times are always part of the SLA between an AMC and a lender…Now, here’s the grain of truth at the center of this ridiculous myth: lenders are working to incorporate so many new compliance rules into their processes that the collateral valuation process is simply taking longer for many of them than it has in the past. Part of this comes from the fact that compliance checking takes time. Part of this comes from unnecessary processes within the lender’s shop that exist out of some executive’s fear of possible compliance problems. The appraisal process is taking longer in many cases, but it’s not due to the AMC. It’s just part of the new business environment we’re working in.

MY Opinion of Myth 2: This is simply a reframing of the conversation between lenders and AMCs. The biggest problem with most AMCs today is they demand an unreasonable turn around time – some require 48 hours (more with complex properties), about 1/3 the minimum average time needed to do a reasonably competent job. Because the AMC bank appraisal quality is generally poor, AMCs have to insert more and more checklists into the QC process to appease their lender clients. The lender clients require more service level agreements BECAUSE THEY DON’T TRUST THE QUALITY OF THE PRODUCT, NOT BECAUSE OF MORE FEDERAL COMPLIANCE ISSUES. In turn, the appraiser gets a gum chewing 19 year old who calls them every day to fill out a checklist. Banks were fine, pre-HVCC, with the turn times of their in-house and outside fee panel staff and it NEVER was as fast as the typical AMC requires today. Today, most AMCs have to differentiate themselves from other AMCs by cost and turn around standards. With the poor quality of the typical AMC bank appraisal, the AMC gets squeezed financially as banks and appraisers are beginning to push back with more requirements and costs. An appraisal is NOT a commodity – it is a professional service. If the AMC doesn’t respect the bank appraisal industry and pays them poorly, all the AMC can ever hope to receive in return is a poor quality product that can’t be check listed away.

THEIR Myth 3: The lender relinquishes control when they outsource to an AMC

The lender is in complete control at all times and federal regulators have made it crystal clear that the lender is the responsible party anytime they outsource to a third-party vendor. No lender will relinquish control to a third party when it knows the CFPB will come back to its front door in the event of a problem. There are some aspects of the collateral valuation process that the government has said must be removed from the control of the loan officers originating the loan and the managers who oversee them. Federal regulators do not want the lender to control the outcome of the appraisal process and so they have made it clear in the regulations that it must be moved away from the origination department. The uncomfortable truth is that the federal government wants the lending institution to lose a bit of control here, for the good of the consumer and the financial institution. But handing responsibility for a few aspects of one process to a third-party outsourcer is not the same thing as giving away control. No lender we know and no good AMC executive would equate these two.

MY Opinion of Myth 3: One of the biggest myths furthered by many AMCs is to fog lenders with the idea that HVCC requires banks to use them to be compliant. The statement “The uncomfortable truth is that the federal government wants the lending institution to lose a bit of control here” is very misleading. All the government wants is a separation between the sales function and the quality function of a bank – a firewall – which is an AMCs major selling point. The irony here is that large AMCs are just as susceptible to lender pressure as the individual appraisers, but on a much larger scale.

I am not anti-AMC. However I am against bank appraisers paying for a bank’s compliance with HVCC and being marginalized as a result. The appraiser is the expert developing the value opinion for the bank, not the AMC.

In my experience to date, the majority of AMC bank appraisals that I have seen are very poor. But it doesn’t have to be that way. If the lender paid the market rate for an appraisal and an additional fee for the AMC to administer the process, the quality would improve. Borrowers today generally don’t realize that the bank appraisers is paid a fraction of the “appraisal fee.” Today’s bank appraiser is paying for the bank’s compliance with HVCC and this has largely destroyed many of the quality firms in the appraisal industry. It doesn’t help that the residential appraisal industry has no real representation in Washington.

But I do like my chair.

Tags: Appraisal Management Companies, AMC, Aeron Chair, HousingWire

31 Comments

One of our appraisers just got an addendum request for an appraisal we recently delivered to an appraisal management company. If you know my history, relax, it’s an AMC that accepts our reasonable fee and turnaround times rather accepting the typical AMC terms dictated to most appraisers (we won’t work for that type of AMC). But as reasonable as this AMC is to deal with, we do receive maddening addenda requests (asking the appraiser for written clarifications on the report originally submitted).

Here’s the latest:

Reporting discrepancies noted regarding subjects site size (pg 1, addendum comments, survey). Appraisers to comment and revise as appropriate, including applicable site adjustments.

Translation: we needed to reconcile the following:

• Lot size per town records (and used in our report): 0.365 acres or 15,529 square feet.
  
• Lot size per survey: 0.3655 acres or 15,530 square feet.
  

That’s a 1 foot difference in the amount of land under the house or a 0.006439565% difference in the amount of land reported in public record and the survey (aside from the fact that the town drops the 4th digit from the acreage measurement in their public record listing).

As a result of using public record for the acreage information, we got dinged on our “appraiser rating” which impacts our volume flow (appraisal requests from a client)

This is just the tip of the iceberg as to the types of addendum requests we receive. Curiously, we NEVER receive requests questioning the value or how we arrived at it – the questions are always clerical minutia, reflecting the 19 year clerk chewing gum who doesn’t really know what an appraisal is.

Sigh.

Tags: Appraisal Management Companies, AMC, addendum request

2 Comments

…a new web site.

I haven’t posted to Matrix in over a month, by far my longest gap since I launched this in the summer of 2005. I love blogging, but technical problems have taken some of the fun out of it.

It goes like this. A little over a year ago I was looking to upgrade our web site millersamuel.com after a 10+ year run without a change. I also wanted to create a subscription service to make a lot more metrics available as well as consolidate other sites I had like the one for my podcast: The Housing Helix.

I was looking around for a web developer since the friends who built my old site had moved on to other full time jobs and didn’t have the time to commit to it. Taking in all the feedback from friends and colleagues I interviewed several candidates and went with a husband/wife consulting firm that had worked on sites for large companies including my friend’s firm. Their pricing was similar to the others I interviewed but I went with them because my friend highly recommended them.

Wow, I made an insanely big mistake.

Within a month after we began development, the practical cost to build the site appeared to quadruple (conservatively) what was agreed to. It was clear they were more interested in paying their developers first before worrying about creating what I had asked for.

The development process was like playing “telephone.” I wrote and mocked up my specs and gave it to the consultants. They told the designer and the designer created something disconnected from what I asked for. So I would view the new design and request all the changes so it reflected my branding, messaging etc. that had been covered in countless meetings and conversations. They would convey to the designer who would send me a link. They didn’t make most of the changes I had requested and usually went off in a different direction. After 15+ rounds of this for the home page alone, I would get a bill at 4x what it should have cost because the consultants couldn’t convey to the designer what I wanted yet I had to pay their vendors who charged me for it.

Question: If went into a Starbucks and ordered a drink but got the wrong one because the Barista wasn’t very good (theoretical only) at their job, would Starbucks charge me for 2 drinks because they had to remake it correctly? What if they did that 15 times??!!!

It became obvious that they didn’t have the technical skills to create the site so I fired them (in hindsight – waaaay too late) and asked my developer friend with the new full time job to cobble the site together so it could function – despite an awful internal structure, lots and lots of notes in Russian and useless code (as I found out later).

Suggestion to consultants once they get fired: Don’t send the client an email asking them to outline in writing all the problems that lead to the firing so they can fix the problem because they take the failure very seriously. As a client I had already been forced to request the same fixes over and over and over so I found it ridiculous that I had to explain yet one more thing. I didn’t.

We got super busy at Miller Samuel so I sat on a new web site design for a year, still stewing about how badly I was burned.

Somehow I happened to stumble into a great web developer and work is well underway on a new site. I consider myself lucky. These people are nice, but unlike my previous experience, I interact directly with the designer, programmer, tech person etc. through the Basecamp platform and can see progress evolving.

Now simply take my experience and do a “Find and Replace” on all instances of the word “consultant(s)”. Replace it with “appraiser”, “real estate agent”, “real estate broker”, “contractor” or “house painter” and it makes sense. Just because a friend or neighbor recommends someone for a service, don’t be blinded by it. Still do your homework and check into their abilities. I’ve learned that even personal referrals can be hit or miss (and expensive).

While I’m not updating my Matrix blog content until the new site is installed, I’ll soon be flooding all your feeds with housing insights in the new year (so rest up).

Comments Off on All I Want for Christmas…Is A Good Professional Referral and…

In this series, I’ll focus on things that our readers probably know the answers to but want an outside perspective.

I’m a realtor in Las Vegas and a regular reader of Matrix and Soapbox. Thank you for both.

I’m writing in hopes that you may be able to address a question I have long had concerning appraisals of new construction…or could direct me to where I could find an answer.

During the boom, a builder would typically have several phases offered…phase 1 might be priced at $160 per square foot, phase 2 would jump to $180 PSF, phase 3 at $210 and so on.

My question is: how was an appraiser able to justify the purchase price of the first buyer in phase 2, when every single comp in phase 1 was so much less expensive? And how did the first buyer in phase 3 get an appraisal for a price substantially higher than all the comps in phases 1 and 2? It never made sense to me and I felt then (and still feel now) that the ability of developers to get appraisals to justify any price allowed them to create sales pitches based on appreciation rather then the intrinsic value of home ownership.

The reason I’m bringing this up now is because it’s happening on the downside as well.

Two years ago, a friend of mine signed a pre-construction contract to purchase a Miami condo for $500,000. Construction is nearing completion.

My friend would love to get out of the deal without losing her entire $100,000 down payment. She was hoping that the condo wouldn’t appraise, but of course it has…for precisely the amount stipulated in the purchase contract and despite the Miami condo market having been in a tailspin since the time she entered into her contract.

For the life of me, I am unable to explain to her how this is possible, so I’m sure I must be missing something. Any insight (or direction to another source) regarding the unique relationship between appraisals and new construction would be most appreciated.

Thank you in advance for any reply you may be able to provide.

Best regards,
Eric Young
eric@ericyoung.com
http://www.ericyoung.com

Eric brings up a significant issue in the valuation process: appraising in new developments. Here’s a magazine article I wrote about the topic three years ago that may provide some additional insight.

Valuation in a new development project is actually difficult because the sales are not a matter of public record, the contracts are provided by the seller (developer) and not independently verified and there may or may not be comparable sales in the immediate vicinity outside the complex.

In the scenario you provide, the appraisals performed in later phases would only work in a flat market when using early sales, so therefore external evidence must be considered to be able to justify the first sale in a new phase, or a contract when the market is falling.

External influences should include contracts in other competing developments (contract dates as of right now) to show trends, current contracts of re-sales in the same or competing developments to show trends, current listings of similar properties in the new development to show trends. In other words, in a third phase where a re-sale of a phase one listing is less than your contract should be enough to prove the purchase price is above market levels (assuming its comparable).

The problem with appraisals done in new developments can be more about independence of the appraiser than the use of comps. If the developer arranges financing, they are likely going to own, hire or or have a financial relationship with a mortgage broker or local lender. The appraiser may have been offered a package deal to appraise these properties in bulk or more efficiently for the lender or mortgage broker. The act of saving the applicant $25 on an appraisal fee may also serve to remove independence from the process since killing a sale could cancel 100 future appraisal assignments. duh!

At the end of the day, the appraisal is supposed to reflect market value as of the effective date of the report. If the market is falling, it has to be evidenced by market data so its probably worth reviewing the report that was completed on the property. I don’t know the laws in those markets, but I suspect copies can be obtained before closing. If contracts were used to substantiate the value, they are only valid if the contract date is recent. Otherwise, they reflect a different period in time and are equivalent to using old closed sales.

The appraisal needs to reflect market value in place as of the effective date of the report, otherwise its just another silly form to fill out.

Tags: NAR, National Association of Realtors

3 Comments

In this series, I’ll focus on things that look pretty basic, but I need your help.

One of the most overused phrases in residential housing commentary is

as in…

…but the fundamentals are strong… or the equivalent. Here’s an example of its use:

According to the most recent report from the Houston Association of Realtors, sales in July 2007 actually INCREASED from July 2006. With a “credit crunch” or liquidity crisis in the mortgage market, Houston’s strong underlying fundamentals are likely the cause.

or this…

Spreads on commercial mortgage-backed securities have widened with the turmoil in the wider debt markets and the cost of commercial mortgages has risen, even as real estate fundamentals are improving.

But here’s a clue (vacancies and rents):

Commercial-real-estate fundamentals such as vacancies and rents are solid. But lending practices in the commercial sector became aggressive in 2005, 2006 and the first few months of this year, which could lead to more serious problems.

and lately its been more of a commercial real estate phrase than a residential:

the difference between now and 1991 “is that the economy is strong and the real estate fundamentals are great.

Its a phrase that seems to sooth all concerns because those “fundamentals” are pretty basic (er…sorry).

But what are they? And can we all agree?

Wages, employment, economic growth….

Tags: Forbes, NAR, National Association of Realtors

3 Comments