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Its Thursday Friday, so its that time of the week to provide my Three Cents Worth as a post for Curbed. Coffee rings prompted this analysis.
To view post: Three Cents Worth: Housing Market = Wet Sponge
Previous posts can be found here.
Tags: Three Cents Worth, Absorption, 3CW
[This monthly market report is provided by Chip Wagner and Robert Headrick of the Headrick-Wagner Appraisal Group in their December eNewsletter. I have had the pleasure of knowing them for most of my appraisal career. They are both very active in appraisal industry matters having held a large number of leadership positions. Their firm has been covering the Chicagoland market since 1970 and as a result, they both have a wealth of insight. Their focus is on relocation, litigation and lending appraisals as well as slayers of appraisal myths. Chip and Bob also author a series of market reports on the Chicagoland real estate market They tell me they are also working on a big revamp of their web site as well.] -Jonathan Miller
WHAT IS HAPPENING NOW?
For the third consecutive month, the Months Supply of Inventory has decreased. Again, it is premature to assume our market has changed as the less-motivated sellers remove their homes from the market during the holidays.
Although there are nearly 3,000 fewer homes listed from last month, almost 8,500 fewer homes on the market from the previous quarter, it is still nearly 11,600 more homes than the same period one year ago. Furthermore, we have not yet seen an increase in the homes under contract or a reverse in the downward trend in the pending and sales volume.
The year end reports are attached o this e-mail and they remain inconclusive as where we are going in the future. The year over year indication continues to show the market today is weaker than it was one year ago. After what we observed in 2006, this is no surprise. The fact that we are seeing positive indications from the previous quarter is welcome.
To put these statistics in perspective, from the 3rd quarter in 2005 to the 4th quarter in 2005, there was a 8.6% decline in active listings. From the 3rd quarter in 2006 to the 4th quarter in 2006, there was a 17.5% decline in active listings. The recent drop in active listings is nearly double the previous year’s drop. This is the first positive that we have actually been able to measure statistically, that indicates 2007 could be a better year than 2006.
WHATS IN STORE?
The Million Dollar question. Hopefully, in the coming months we will be able to see the decline in the Absorption Rates continue.
Buyers that were sitting on the fence, cautious as to making a move in the real estate market appear to be ready. Media reports on the housing sector are not “all negative” and we are seeing some positive reports coming out. Prospective buyers hoping to wait until the real estate markets bottom out may believe it has bottomed out and it is time to buy.
The economy is strong, unemployment is low and job growth is strong. Indications are that mortgage interest rates will continue to be favorable in 2007.
Early indications are suggesting that 2007 will be better than 2006 was. The market needs to begin eliminating some of the supply, and a better indication would be an increase in pendings which shows buyer activity. We continue to closely monitor the sales activity, and hopefully there will soon be clear indications that the real estate market has reversed its 2006 doldrums.
Until then, our opinion of 2007’s Chicagoland real estate market, like many other professionals is “cautiously optimistic.”
Here are some additional market reports:
Headrick-Wagner Chicagoland Report [pdf]
December Condo MarketPulse [pdf]
December Detached Housing MarketPulse [pdf]
Naperville Area Single Family Housing [pdf]
Tags: Chip Wagner, Absorption
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Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).
In Vikas Bajaj’s excellent Page One piece titled Buyers Scarce, Many Condos Are for Rent [NYT], he explores whats happening in the DC market and it’s not pretty.
I recall last year about this time, when everyone was impressed with the +90% increase in Manhattan inventory over the previous 18 months, Washington, DC inventory had increased well over 200% in DC during the same period. The DC condo market had been built for speculators. The absence of investors/flippers is what saved Manhattan and other markets during this housing boom, something also experienced in Manhattan about 20 years ago. Vikas contrasts DC with the situation in Manhattan.
That’s a bubble
Based on the stats, presented in the article, there were about 24,000 condos listed for sale during 4Q in DC. With about 600 units sold in 4Q there, that means it would take 40 months for the current supply to be absorbed by the current pace of sales. More supply is coming on, although slowing down and demand is not expected to surge. It’s likely that 6-7 months is the norm for absorption in DC, like in many markets.
Getting lucky
While the article makes an important point by illustrating the wide void between supply and demand, I was struck by how lucky the one investor interviewed was who couldn’t get what he originally paid for his unit nor would the rental value cover his mortgage. Not only had his broker stopped him from buying several more units to begin with (the broker must have seen the writing on the wall early) but the owner has actually received a range of offers for his unit. He didn’t accept any yet because they were about roughly 10% below his break even. With the significant amount of overhang in this market, I am surprised he received any offers. With the tremendous disparity between supply and demand as well as the weakness of the rental market, it would appear that a 10% discount off the original purchase price would be very generous. Is this yet another bad decision on his part?
Falling rents
Based on the article and what I have read elsewhere, it seems likely that inventory will remain at high levels or even continue to rise in DC as a flood of investors will look to remain whole by renting their units. The excess supply could drive rents down further.
This is also complicated by stalled condos being converted to rentals. The developers interviewed seemed somewhat calm about the conversion as an option. Their tone seemed to be: yes, it provides less of a return because condo construction is higher, but it’s an alternative. The problem is that this type of thinking doesn’t consider the large amount of competition from other condo developers in the same boat.
The one thing DC has going for it is a strong economy with significant employment potential over the next several years. There is an economic theory that correlates investor speculation with optimism over future job growth which will cushion the blow of oversupplied condo markets. That’s seems to be the case in the primary speculative markets like DC, Miami, Las Vegas and San Diego and maybe that’s why no one seems to be in a panic, or perhaps the euphoria still hasn’t worn off?
Tags: Absorption
[This monthly market report is provided by Chip Wagner and Robert Headrick of the Headrick-Wagner Appraisal Group in their November eNewsletter. I have had the pleasure of knowing them for most of my appraisal career. They are both very active in appraisal industry matters having held a large number of leadership positions. Their firm has been covering the Chicagoland market since 1970 and as a result, they both have a wealth of insight. Their focus is on relocation, litigation and lending appraisals as well as slayers of appraisals myths. Chip and Bob also author a series of market reports on the Chicagoland real estate market They tell me they are also working on a big revamp of their web site as well.] -Jonathan Miller
NOVEMBER LISTING INVENTORY DROPPED
This is the first time in 2006 that the Months Supply of Inventory has decreased. Although this is a good sign, it is too early to draw any conclusions that the market is improving, as we are in the period between Thanksgiving and New Years when many less-motivated sellers remove their homes from the market. Hopefully, in the coming months we will be able to see a decline in the Absorption Rates, reflecting the market either beginning to eliminate some of this supply, or sellers who are in no immediate need to sell will remove their property from the market allowing demand to catch up with supply.
Tags: Chip Wagner, Absorption
Inventory levels stirred the most discussion in the shortened holiday week and a lot more answers than the original post was attempting to provide. And lets not forget Stuffing Omelettes, represented to be insanely good and now served on the Matrix Zeppelin:
In a stabilizing/stagnant market, you don’t want to flood the market with units, and so you may choose a specific unit type to offer and figure that the remainders will either be sold alongside them, or held back for rentals. Much of the pricing strategy depends on when the developer sees their first returns. With a 90% LTC, it may take until the penthouse floors are sold for the developer to actually see their ‘profit’…In general, you save the PH for last so that you can leverage the successful sell-out of the lower floors to command a high premium for the PH. If you’ve already made your returns, then you might be wiling to fire sale the remainders.
If the number of condo units being built is spiking up in recent years, leading to new condos being a larger percentage of overall housing stock, then even if the percentage of new condos being warehoused is a constant, wouldn’t those held-back inventory units be increasing as a percentage of overall units available? Meaning data is more skewed now than a few years ago?
I have a similar problem in Charleston. My inventory numbers on condo/townhomes are off because the marketing agents will not list all of the active condos when they are available. For example there is a 315 unit condo conversion and the realtor only has 5 units as active in the MLS right now. This really skews the inventory numbers in the market and it is impossilbe for me to track all these scenarios.
Clearly the tic upward in new developments under construction would skew the unreleased inventory numbers upward a little as well. Does it matter? Is it inventory if it isn’t built yet? When I sell in new construction it may take several months to a year to close the deal. It seems that the equally significant numbers are related to sales volume. The sold and closed deals from new developments today, reflect a significant delay in buyer activity from as much as a year ago. Likewise, I’ve a number of new development deals in contract for next year that represents buyer activity from the second half of 2006. It means that there is hidden buyer activity too. Since it’s ultimately a supply and demand question, to be relevant, doesn’t the inventory question need to be considered in relationship to absorption? How is it possible to really understand it at all with so much elasticity in the timing of that relationship? Suffice it to say Johnathan, that the post raised more questions for me than it answered; but I’d agree with you that, “…this technique has been done for as long as I can remember, inventory numbers should still show reliable trends. In other words, the count would be considered a constant in the equation.” At least I can take comfort in the fact that the inconsistencies are consistent.
Once a developer is in the black, whatever the mix, prices will climb – even if simply to tell customers to submit offers, that invariable tend to be high offers (or higher than the previous asking price) – you can achieve this in any market as long as your initial marketing mix creates a feeling of something being exclusive – once you have that and have sold a unit or two – even at low numbers – you simply make your money back on the remaining property.
I always get a chuckle when I see signs like that – or the ones that say “Make $3000/mo P/T – $8000/mo F/T”. You’d think if they were so successful, they could afford to have professionally-made signs. The best one, however, is the sign on the rolling junker that says “We buy houses”. Yeah, right… you can’t afford four tires that match, but you can buy a house for cash…
Speaking of stuffing. The next morning use the stuffing to make Stuffing Omelettes. It is insanely good.
We see signs, just like the one shown above, all over the Ocala area… and yes, we are also seeing the “We Buy Ugly Houses” ads as well. Just hold on to your britches, the next year should bring us more comedy in Real Estate!
Tags: Absorption, NAR, National Association of Realtors
Fee Simplistic is a regular post by Martin Tessler, whom after 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. He has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week. In this post, teaches us to be wary of short term cycles and think big picture. …Jonathan Miller
One of the advantages of having toiled in the real estate valuation world for some 30 years is that you cannot help but develop an institutional memory and particularly a conviction that the market operates in cycles. As a young analyst with an educational background in real estate economics my involvement in a variety of consulting and appraisal assignments on income producing and corporate properties was always rooted in aspects of supply and demand. Grandiose plans by developer clients did not deter our drawing negative conclusions if poor market demand resulted in long absorption periods and economic infeasibility.
My first exposure to the chasm that could develop between real estate markets and client expectations in appraised value (these were the days of pre-FIRREA/USPAP) was in the early 1970’s. At that time the then nascent world of mortgage REIT’s was a period of very aggressive lending that could be characterized as “money chasing deals”. Many of the assignments involving new development did not seem to pan out to the scenarios or expectations of clients in terms of value or anticipated time horizons. Anyway, this was not our concern and one would have to assume that any shortfall in value or other expectations would have to be addressed in the underwriting by the lender. The aggressive REIT lending cycle of the early 1970’s was exacerbated and came to an end as a result of the first Arab Oil Embargo/Energy Crisis in 1974. This led to vast double digit inflation and interest rates and the term “disintermediation” -the word coined by PhD economists to explain the vast withdrawal of deposits from passbook savings accounts that were paying single digit interest. Financing for new construction all but disappeared in light of these cyclical conditions.
Fast forwarding to the late 1980’s saw a different phenomenon develop: aggressive lending by S&L’s and fraudulent valuations by unscrupulous appraisers leading to massive loan writedowns and foreclosures. To save our banking system the FED under Mr. Greenspan drastically lowered interest rates and Washington created the RTC (Resolution Trust Corp) to package the bad loans. Not the least of these reforms was the passage of FIRREA in 1989 and the adoption of USPAP. While this did not deter the miscreants entirely it did cut down on aberrational mortgage lending supported by such fraudulence.
Today, one cannot pick up a newspaper or turn on the TV without hearing how our housing market is crashing and bringing the economy down. Lost in this reportorial rhetoric is the fact that the housing market is not one mega-market but many individual local markets with varied demand based on employment prospects. Markets that have not caved are likely to be those where employment has grown or at least not declined. Using New York State data, housing prices have appreciated 73% over the past 5 years with median price rising 11% between 2004-5. Can this hot trend continue? Perhaps in the Manhattan market where booming Wall Street activity portends huge year-end bonuses and likely to drive demand. Will this spill over to the rest of the State not likely if one takes into account that Buffalo, Syracuse, Rochester and Albany are also in New York. Any market declines are likely to be localized and cyclical rather than nationwide. Applying a long term perspective to the market can bring into focus that we have been mesmerized by a short term cycle over the past 4 years and cyclicality and real estate are not mutually exclusive.
For those who believe that markets must always be on the upswing to higher values or prices it reminds me of the joking we used to do in the earlier days when Discounted Cash Flow (DCF) analysis first came into practice. We called it the 4th Approach to Value: “you tell me the value you want and I’ll tell you the assumptions you have to use to get there”.
Semper Fee Simplistc
Tags: Absorption, Martin Tessler, Soapbox Blog, Fee Simplistic
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Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).
Click here for full graphic [NYT]
Well, sort of.
One of the long used investment arguments for the housing market has been the idea that housing prices have never declined in the modern era. This shouldn’t (but it does) suggest that prices don’t decline. Its a play on statistics.
This month, three of four national regions saw a drop in median sales prices and all regions saw sharp drops in the number of sales. This is still is a play on statistics since I would guess that housing prices in many of the three regions (all but the South) are not falling, but rather, the mix of units has changed. This is not to say they won’t, but I don’t get the impression that sales prices (not list prices) are actually falling on most actual transactions based on current media coverage.
Its also interesting that national inventory absorption now takes 7.3 months versus 4.6 months a year ago.
Perception-wise, its going to get interesting if the South stops holding everyone else up. Market psychology/mob mentality is a fragile thing.
Tags: Absorption, Getting Graphic
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Its Wednesday, so its that time of the week to provide my Three Cents Worth as a post for Curbed, who tells me they are largest trafficked real estate web log on the planet (re: earth).
Curbed: Three Cents Worth: Absorption Makes Us Bloated
Previous posts can be found here.
Tags: 3CW, Absorption, Three Cents Worth
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Troy McMullen’s thorough article today Condos With a Name: ‘Available’: The Architect May Be A-List, But the Location Often Isn’t; Meier, Libeskind Languish [WSJ] talks about the Starchitect phenomenon and how thats not necessarily the panacea for real estate developers trying to move their product. [and my firm is cited as a source in the article – excessively shameless plug]
I recently wrote an article about Starchitects in New York Living and concluded that while it was an effective way to differentiate a new offering, the initial motivation for their services is now diluted as it becomes the norm and the efforts don’t tend to stand out as much any more.
Its definitely an exciting time for lovers of architecture.
One of the most difficult aspects of rating the success of a new development is how rapidly the units are being absorbed. Having been on both sides of the fence, first as a condo sales director more than 20 years ago, and since then as an appraiser, I can appreciate the dilemma that all parties go through in this process. There is a lot of money at stake and much of the success of the project depends the timing of its entry to the market. Its all about keeping the momentum going in the initial concentrated marketing effort.
The data is not verifiable in public record until closings begin and rumors among the brokerage community can spread like wildfire. The speed of absorption tells us how accurately the property is priced and how well the mix of units matches the neighborhood. The exageration of sales success can backfire as the development moves closer to completion. The gap between actual sales and “told” sales gets more and more difficult to explain as evidenced in this article and can result in a consumer backlash.
At the end of the day, its still all about price and its relationship to the amenities provided. And in a less frenzied market, price becomes even more critical and the market less forgiving.
Here is another article I wrote on the problems appraisers face in valuations within new developments:
Appraising “New” New York Real Estate [New York Living]
Tags: Absorption
John Philip Mason is a residential appraiser with 20 years experience and covers the Hudson Valley region of New York. He’s a good friend and a true professional who provides unique insight to appraisal issues of the day. Here is his weekly post called Solid Masonry. This week John addresses the profit squeeze for builders. Jonathan Miller
During the past several months I’ve noticed a growing trend when out in the field appraising new residential construction. In speaking with long-time builders I keep getting asked the same question, “What’s happening to home prices?” Upon further inquiry I’m finding more and more builders who are convinced the numbers no longer add up. That is, after they figure in the current cost of acquiring building lots, plus their projected hard and soft costs, there is little or no profit left. Experienced builders are left wondering what to do despite the mounting evidence that tells them it’s time to lay low.
Their numbers and instincts seem to correspond with numerous statistics being cited in the media lately. Increasing prices in land, building materials, labor, energy, insurance and the cost of construction funding are massing an assault on their livelihood. These are just a few of the many examples I found:
Area Contractors Battle Rising Cost Of Materials by Todd Pack and Naomi Snyder of Tennessean.com. Here the writers cite various figures such as “On the whole, construction material costs grew by 10% in 2004 and 6% last year, according to a new survey by the Associated General Contractors of America.”
Costs Stifle Construction Boom Builders Brace For Rise In Material Prices, Interest Rates by Rodney Tanaka of the WhittierDailyNews.com. While citing escalating construction costs, Mr. Tanaka attempts to provide reassuring rhetoric that in fact the new home construction market is healthy. But he concludes with some ominous predictions, including one by Leandro Tyberg who says, “My gut is telling me if construction costs continue to rise at the rate they have risen in the last 24 months, projects will die.”
At the same time demand for new construction seems to have diminished greatly as large scale developers such as Toll Brothers released their latest numbers. The RealEstateJournal.com article Toll Brothers Posts 49% Jump In Net But Trims Forecast by Janet Morrissey sounds positive enough. However, upon reading further we find “Orders, which serve as a barometer for revenue the company will receive when a home is delivered three or four quarters later, plunged 29% in the fiscal first quarter that ended Jan. 31.” Ouch!
Meanwhile, the cost of short term borrowing (i.e. construction loans) is going nowhere but up. In his article, Get Ready For No. 15 In A Series At The Fed, Mr. Louis Uchitelle of the NYTimes.com seems to think the new Federal Reserve Board has something to prove with more rate increases waiting in the wings. He writes, “They all really want to project a sense of continuity with Greenspan,” said Tom Schlesinger, executive director of the Financial Markets Center, “and they are going to err on the side of cautiousness if that is what it takes to do this.”
At the same time we are left looking around and asking ourselves, just how much new construction inventory is available? I’ve done an informal survey by searching three different MLS systems covering the suburbs directly north of New York City. The straight answer is, more than half the communities currently have 12-24 months of new construction inventory, based on their rates of absorption in 2005. Not too bad, but wait a minute, absorption rates are down in 2006.
The combined impact of these market forces is certain to leave some builders over extended with inventory worth less than they paid for it.
So if builders can’t recoup their expenses, are they about to become deconstructed? Because the numbers don’t seem to add up.
Tags: Soapbox Blog, Solid Masonry, John Mason, Absorption
In case readers of Soapbox missed this post in my other blog, Matrix Central Park: No Price Can Be Attached To The Center Of The Universe I placed it here as well.
One of the reasons to love Manhattan is clearly Central Park. New York Magazine asked us to venture a wild guess as to what Central Park was worth in the article Reasons to Love New York: Because We Wouldn’t Trade a Patch of Grass for $528,783,552,000.
So there is no confusion, this is a purely hypothetical, far-fetched, non-scientific wild guess based on so many caveats (and done in about 3 minutes) that reality doesn’t enter into the equation so we are not violating any licensing requirements…got it?
After the dust settled, here’s the math used.
Webmaster’s Note: Its quite possible, and highly likely, that the net value of all of Manhattan would be less after Central Park was developed. A very high level of inventory that might take decades to absorb would be created, but assuming instant absorption, units facing the park would lose their views, proximity to the park would not matter anymore and a cultural and recreational resource would be lost to all homes in Manhattan. In other words, it would likely be bleak on the real estate front.
Imagine Central Park on the real estate market [The Real Deal]
Appraised value of Central Park: $528,783,552,000. Sell! [Curbed]
Update
Central Park: $528.8 Billion [The Walk-Through]
Tags: Appraisal Process, Absorption, Soapbox Blog, Adjustments
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One of the reasons to love Manhattan is clearly Central Park. New York Magazine asked us to venture a wild guess as to what Central Park was worth in the article Reasons to Love New York: Because We Wouldn’t Trade a Patch of Grass for $528,783,552,000.
So there is no confusion, this is a purely hypothetical, far-fetched, non-scientific wild guess based on so many caveats (and done in about 3 minutes) that reality doesn’t enter into the equation so we are not violating any licensing requirements…got it?
After the dust settled, here’s the math used.
Webmaster’s Note: Its quite possible, and highly likely, that the net value of all of Manhattan would be less after Central Park was developed. A very high level of inventory that might take decades to absorb would be created, but assuming instant absorption, units facing the park would lose their views, proximity to the park would not matter anymore and a cultural and recreational resource would be lost to all homes in Manhattan. In other words, it would likely be bleak on the real estate front.
Imagine Central Park on the real estate market [The Real Deal]
Appraised value of Central Park: $528,783,552,000. Sell! [Curbed]
Update
Central Park: $528.8 Billion [The Walk-Through]
Tags: Absorption
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Jonathan Miller is President and CEO of Miller Samuel Inc., a real estate appraisal and consulting firm he co-founded in 1986. He is a state-certified real estate appraiser in New York and Connecticut, performing court testimony as an expert witness in various local, state, and federal courts. He holds the Counselors of Real Estate (CRE) designation, is an Appraiser “A” Member of the Real Estate Board of New York, and is a member of RAC.
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