Speed, Greed & Shame: Finger Pointing at 99 Houses while reaching $998,000

After last week’s epic teaser trailer for the upcoming “Big Short” movie in December, I have become even more fascinated by the new wave of housing boom & bust story telling. The housing prices peaked in 2006 and here we are 9 years later, still trying to understand what happened. In some ways it’s like the procession of movies and books about Steve Jobs since his death in 2011 (4 years this Monday) yet other than the Walter Isaacson book- I was very upset when he passed – but I don’t really care to know more because I lived his brand for several decades. I’m one of the biggest Apple nuts on the planet, having built our appraisal business on Macs and indoctrinated many total strangers on the virtues of the Mac to the point people remember me as that Manhattan appraiser who is a “Mac” guy. Yet I have no desire to know more about him. However I possess endless to interest to read and watch any form of media that covers the epic housing market boom, bubble and bust of the last decade. Perhaps it’s the idea that many responsible got rich and were never punished. I really don’t know.

There’s a new movie out on the Florida crash that takes place in Orlando – ironically the same place were the documentary “Queen of Versailles” takes place. The new movie 99 Homes takes place during the housing collapse in Florida.

The real estate broker is playing the foil to the story’s main character, a father who’s family was evicted from their home. The problem with the story premise is that the stereotyped greedy real estate broker angle does’t work for me. I’m not saying there weren’t brokers who were bad actors (no pun intended) but there were plenty more home buyers who were complicit in the systemic collapse. In fact I’ve long said that the real estate broker/agent, long the punching bag for all things real estate, was far less complicit in housing collapse than everyone else: buyers, sellers, commercial banks, investment banks, appraisers, mortgage brokers, loan officers, regulators, credit rating agencies and Congress (shout out to Phil Gramm and others). Despite the movie’s stereotyped plot line, it does looks interesting but I’m not sure whether I’ll see it. After all, I watched Hobo with a Shotgun on my flight to Shanghai a few weeks ago so I’m clearly no Roger Ebert.

Now back to reality, not just the reality facing Manhattan residents.

Manhattan: Nearly reaching the $1 million median sales price threshold

Whether you are reading this Housing Note from the perspective of someone in New York City or somewhere else where prices are high in the context of your local market, this pertains to you. I’m thinking this applies to everyone in the U.S. using that description.

On Thursday our quarterly report was released for the 3Q 2015 Manhattan apartment sales market (co-ops + condos). There was a firestorm of interest in the near $1 million median sales price threshold lede.

In the report for prior quarter I described the market as having housing prices with a “record number of records.” In this quarter there were also many records but I was more interested focusing on the record pace of the market – it has accelerated.

The key points that I brought up in my blog post yesterday were:

  • Median sales price was second highest on record, highest since 2008
  • PPSF set 26 year record of $1,497 per square foot
  • Year-over-year sales increased for first time in a year as pent-up demand from financial crisis has been fully absorbed
  • Listing inventory growth stalled in 2015 after bottoming at the end of 2013
  • 51% of all sales were cash purchases, up from 43% a year ago
  • 53.9% of all sales were “at or above” list price at time of contract, a seven year record
  • Luxury housing prices did not see the same growth as overall market
  • Days on market was lowest (fastest) in 15 years at an average of 73 days
  • Larger price gains seen in larger apartments such as 2, 3, 4 bedrooms than studios – 1 bedrooms
  • New development market share of closed sales continued to rise

In this clip, CNBC focused on the brisk pace found in the report, including commentary by Howard Lorber, chairman of Douglas Elliman, the firm we have prepared research for since 1994.

Here’s what the PPSF record looks like over the 26 years I’ve been tracking it.


[click to expand]

Record and Near-record Housing Prices Are Not Signs of Market Health

I am uncomfortable with the brisk market pace that has developed in most U.S. housing markets these days when wage growth remains so stagnant and credit remains so tight. A robust stock market has created a lot wealth in recent years and has enabled many to jump into the housing market and be less dependent on access to mortgage financing. But what is keeping me sane about conditions has been the heavier volume of sales activity over recent years, especially when other fundamentals like employment are improving but usually require an “*” to fully explain. I’ve always viewed sales activity (pending or closed), inventory and the outlook for local economy as a better barometer of a housing market’s health than more simplistic price trends.

Let there be no misunderstanding here: housing price records are sexy to write about and easy fodder for sound bites – like watching an actor or actress walk down the red carpet at the Academy Awards. What I find so interesting with the current market, is the heavy sales volume and record prices, while sales activity is fairly high despite tight mortgage lending conditions. Existing inventory can’t keep up with demand. In New York City the conversation has been so fixated on foreign buyers as the key to the market, that we forgot about a robust city economy with record job growth and a shear record total number of employees. Throw in a population expansion that is 5 years ahead of trend (NYC is hitting 2020 census projections this year – 2015 if you aren’t sure what year it is) and there is a lot of fuel in the tank (at unusually low prices for a barrel of oil that won’t seem to to come back up – sorry, for the lame analogy).

Here are just some of the headlines from yesterday’s coverage (in no particular order) of our Elliman report that tell the story.

  • Manhattan Apartment Prices Near Million-Dollar Mark, Reports Say [NY Times]
  • Manhattan Homes a Bright Spot in Dour Quarter as Prices Soar [Bloomberg Business]
  • This is how much you need to buy a home in Manhattan [CNNMoney]
  • Manhattan real estate hits new price record [CNBC]
  • There Are Plenty of People Who Want to Buy Manhattan Real Estate — There Just Aren’t Enough Apartments to Go Around [NY Mag]
  • Manhattan’s median price closes in on $1M: report [The Real Deal]
  • Market Reports: Sorry, Manhattan won’t Become Affordable Anytime Soon [Brick Underground]
  • As Manhattan Prices Keep Climbing, Inventory Plummets [Curbed NY]
  • The millionaires’ borough: Average sales price of a Manhattan apartment soars to record high of just under $1MILLION [Daily Mail UK]
  • Manhattan real estate prices increase by 18% over 2014, ‘highest in 26 years’ [Daily News]
  • Manhattan apartments selling at record pace and price [Crains]

Part of the challenge to housing, and why “affordable” is so vehemently talked about these days is the lack of supply. …(segway alert)…well the appraisal industry has a supply problem too.

There is now a U.S. appraisal shortage

The laws of supply and demand have begun to rear their ugly head in the bank appraisal industry.

According to Valuation Review, a well respected appraisal news site said:

The American Bankers Association (ABA) Center for Agricultural and Rural Banking and ABA’s Commercial Real Estate Committee held a meeting with key stakeholders to address the pending shortage of residential, commercial and rural property appraisers, and its implications.

It’s about time.

Since 2009 regulations now part of Dodd-Frank and the proliferation of the institutional middleman known as “appraisal management companies” aka “AMCs”, there is now a shortage of appraisers who will work for banks. Here’s the abbreviated logic as to why:

  • To prevent collusion between mortgage brokers and appraisers that was 2/3 of residential single family mortgage volume pre-Lehman, former NYS AG Andrew Cuomo struck an agreement with Fannie Mae to not buy bank loans where the appraiser was selected by the mortgage broker (remember, that they only get paid if loan closes so guess what kind of appraisers they lean towards). My competitors who relied heavily on their volume have since been wiped out, so have the lion’s share of mortgage brokers. I’m not saying all appraiser-mortgage brokers were corrupted, but it was clearly a structural mistake to allow it without out controls.
  • Since most large banks closed their inhouse appraisal departments as “cost centers” during the housing/credit bubble (think WaMu) since quality risk no longer existed thanks to financial engineering by Wall Street and absence of regulatory oversight and rating agencies using the wrong data to declare CDOs as “AAA”, banks turned to AMCs to manage appraisers. The problem was they took about 50% of the appraiser’s fee and proudly claimed it would have impact on quality. Imagine if your company cut all employee’s wages by 50%, would it impact current employees and the calibur of new employees applying for jobs there? It’s an insane notion.
  • Good appraisers like my firm (and by “good” I mean not “form fillers driving in from 3-5 hours away as the low bidder to appraise something in a market they aren’t familiar with) left the market or retired or moved into other related types of valuation. That’s what we did and it is far better to work for clients that actually want an independently produced and credible valuation result.

And by the way, while this is all happening, the appraisal industry’s two biggest institutions, the Appraisal Institute, by far our largest trade group, and the Appraisal Foundation, “the primary valuation standard setting and qualifications body for the United States”, have been bickering like school children for the past five years and think the industry doesn’t see it. The top leadership in both organizations have released truly embarrassing snipes toward each other in passive-aggressive tones to substantiate their positions while the memberships and users of their services are suffering in the worst way possible, being driven into oblivion by a banking industry that wants to commoditize a profession.

Shame on both of you for letting us all down.

But not shame on you dear readers for sticking with me! Please tell a friend about our Housing Notes. There is no shame in that!

See you next week.

Jonathan Miller, CRP, CRE
Miller Samuel Inc.
Real Estate Appraisers & Consultants

Must Reads

New Content and Research