Matrix Blog

It was close to 60 degrees in Manhattan yesterday which reminded me I neglected to post Ed Glaeser’s fascinating commentary in the Economix Blog of the New York Times called Revenge of the Rust Belt.

It also brought to mind a Steven Wright favorite of mine:

It doesn’t matter what temperature the room is, it’s always room temperature.

But I digress

Glaeser correlates population trends with January mean temperature. As a nation, the sun belt continues to see population growth and the midwest continues to see population contractions.

Pittsburgh has its Steelers because high transport costs made it costly to move coal. Prodigious amounts of energy were needed to work the metals, like iron and steel, which were the hard core of the Industrial Revolution. Since moving vast amounts of coke or coal was expensive, Andrew Carnegie’s steel factories were close to Henry Frick’s coking furnaces, which were close to Pittsburgh’s vast coal seam.

Over the course of the 20th century, transport costs plummeted. The real cost of moving a ton of goods a mile by rail declined by more than 90 percent. Manufacturing left cities, the Rust Belt and America altogether. Every one of the old industrial cities declined greatly. The city of Pittsburgh’s population fell from 677,000 in 1950 (its peak) to 334,000 as of the last census, and apparently less than 300,000 today.

The advantage a market like Phoenix has in the long run, despite the sharp declines in housing, is the potential for more affordable housing because of the unrestricted capacity to build and expand.

Tags: Commerce Dept, Census

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I am not one for mushy demographic survey stats, but this one intrigued me because it incorporates Census findings and overlaps with housing sales. “Who Moves? Who Stays Put? Where’s Home?”

As a nation, the United States is often portrayed as restless and rootless. Census data, though, indicate that Americans are settling down. Only 13% of Americans changed residences between 2006 and 2007, the smallest share since the government began tracking this trend in the late 1940s.

A new Pew Social & Demographic Trends survey finds that most Americans have moved to a new community at least once in their lives, although a notable number—nearly four-in-ten—have never left the place in which they were born.1 Asked why they live where they do, movers most often cite the pull of economic opportunity. Stayers most often cite the tug of family and connections.

On the surface, this seems to contradict the surge in sales activity in 2004, 2005 and 2006 during the housing boom. However, NAR indicated that roughly 36% of all sales in 2004 were investor or vacation home sales. I interpret this as a surge of secondary housing, not primary, which is one of the reasons the surplus housing stock is going to be difficult to absorb over the next several years. Although I can’t find an updated version of those numbers (likely because they would not be rosy enough), I suspect they are nearly a non-factor now.

Exercise: try counting the number of times you have moved in your entire life, including higher education if applicable. I moved roughly every 4 years before I left for college, then every year of college (2x) and every 2 years until I owned my first house. After that I averaged once every 6 years. 8 states. I am sick of moving.

The findings that interested me most:

• Most adults (57%) have not lived outside their current home state in the U.S. At the opposite end of the spectrum, 15% have lived in four or more states.
• More than one-in-five U.S.-born adults (23%) say the place they consider home in their heart isn’t where they’re living now. And among those who have lived in two or more communities, fully 38% say they aren’t living in their “heart home” now.
• The Midwest is the most rooted region: 46% of adult residents there say they have spent their entire life in one community. The least rooted is the West, where only 30% of adult residents have stayed in their hometown. Residents of the South (36%) and East (38%) fall in between.
• College education is a key marker of the likelihood to move: Three-quarters of college graduates (77%) have changed communities at least once, compared with just over half (56%) of those with a high school diploma or less. College graduates also are more likely to have lived in multiple states.
• Movers are more likely than stayers to say there is a good chance that they will move in the next five years. Not surprisingly, only a third of those who rate their current communities highly predict they’ll move within five years, compared with half of those who give their current communities a poor rating.

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

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There was an interesting Op-Ed piece in the New York Times this week written by Howard Husock of the Manhattan Institute called Housing Goals We Can’t Afford.

The article points out that with all the housing and mortgage woes across the country, it’s pretty easy to point fingers. However, it gets more difficult when you point them at groups that tried to do the right thing.

The Community Reinvestment Act was passed in 1977 when bank competition was sharply limited by law and lenders had little incentive to seek out business in lower-income neighborhoods. But in 1995 the Clinton administration added tough new regulations. The federal government required banks that wanted “outstanding” ratings under the act to demonstrate, numerically, that they were lending both in poor neighborhoods and to lower-income households.

Banks were now being judged not on how their loans performed but on how many such loans they made. This undermined the regulatory emphasis on safety and soundness. A compliance officer for a New Jersey bank wrote in a letter last month to American Banker that “loans were originated simply for the purpose of earning C.R.A. recognition and the supporting C.R.A. scoring credit.” The officer added, “In effect, a lender placed C.R.A. scoring credit, and irresponsible mortgage lending, ahead of safe and sound underwriting.”

I remember at one point, quite a while ago, before digitally delivered appraisals, lenders were calling us to get the census tract number the property was located in. We soon discovered that the standardized binder that held the appraisal and other mortgage documents, required two holes punched at the top of the form. One of the holes covered the census tract number. This number was used to credit the bank with originations in lower-income neighborhoods. It struck home (no pun intended) how important it was for them to cover all the markets.

CRA is a noble endeavor. The solution to uneven lending missed a basic economic fact: banks were pressed to lend in areas with lower home ownership and therefore had to lower their underwriting standards to get enough volume to make the regulators happy.

The result? Higher default rates are experienced in these markets. Mandating quantity creates an environment of weaker quality.

If the Community Reinvestment Act must stay in force, then regulators should take loan performance, not just the number of loans made, into account. We have seen the dangers of too much money chasing risky borrowers.

An argument can be made here for encouraging renting when ownership is not affordable or simply creates too high of an investment risk. You can look around and see what happened when lending practices were not reflective of market forces. Bedlam – good intentions or not.

UPDATE: I got an generic but informative email from the Center for Responsible Lending, likely as a result of this post that contained the header: “Bashing CRA Doesn’t Help.” It provides tangible talking points that are informative. The sensitivity is very elevated over this topic and I wasn’t bashing – I just have a concern over the transfer of risk to lenders – it’s a brave new world out there and interpretation of risk has changed overnight.

Here’s their email text:

According to John Dugan, Comptroller of the Currency, “It is not the culprit.”

Federal Reserve Governor Randall Kroszner says, “It’s hard to imagine.”

They are talking about the wrong but persistent rumors that the Community Reinvestment Act, a longstanding rule to encourage banks to lend to all parts of the communities they serve, is the reason behind for the surge in reckless subprime lending.

First, CRA was passed into law in 1977, well before the development of the subprime market. The majority of lenders who originated subprime loans were finance companies, not banks, and thus not even subject to CRA requirements.

A recent study by the Federal Reserve points out that 94% of high-cost loans made during the subprime frenzy had nothing to do with Community Reinvestment Act goals.

A lump of coal to the media who perpetuate this myth. The sooner we stop finger-pointing and focus on real solutions, the better.

Tags: Commerce Dept, Census, Appraisal Institute, Sub-Prime

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In an analysis done of census data pre-housing boom (1990s), The Brookings Institute in their recent report Where Workers Go, Do Jobs Follow? found that:

• Roughly 65 percent of all residents and nearly 60 percent of all jobs are now located in the suburbs, with over a third of each in the higher-income suburbs.
• Population grew strongly during the 1990s in the lower-income suburbs, while job growth was particularly strong in the higher-income suburbs

And then comes the 2000s
The New Urbanism movement, bolstered by the housing boom’s creation of new luxury housing stock and redevelopment of underutilized commercial districts, has seemingly reversed the long term migration to the suburbs. The decline in serious crime levels in urban markets have also played a major role in boosting demand (and may in turn further influenced the decline)

Will the current economic downturn undo urban housing trends in many US cities?

Based on the St. Lousi Fed research paper City Business Cycles and Crime by Thomas A. Garrett and Lesli S. Ott , perhaps not:

We find weak evidence across U.S. cities that changes in economic conditions significantly influence short-run changes in crime. This suggests that short- run changes in economic conditions do not induce individuals to commit crimes…we do find that short-run changes in economic conditions influence property [versus violent] crimes in a greater number of cities.

I have always seen crime levels and other quality of life issues as long term trends, like steering a super tanker (admittedly, a tired analogy).

And while we are on the subject of research papers…

Tags: Commerce Dept, Census

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This morning I was invited to comment on housing starts for Fox Business Network’s Money For Breakfast show hosted by Alexis Glick.

Here’s this morning’s clip.

I wasn’t at my best on this one – no coffee prior to the interview – but it was interesting to see starts fall yet again. The May housing start figures were released by US Commerce just as the interview began at 8:30am.

Privately-owned housing starts in May were at a seasonally adjusted annual rate of 975,000. This is 3.3 percent (±10.7%)* below the revised April estimate of 1,008,000 and is 32.1 percent (±5.1%) below the revised May 2007 rate of 1,436,000. Single-family housing starts in May were at a rate of 674,000; this is 1.0 percent (±9.9%)* below the April figure of 681,000. The May rate for units in buildings with five units or more was 280,000.

April’s rise seems to be an anomaly. Expectations for housing continue to be negative as evidenced not only by these start figures which suggest there is excess inventory, but the record low NAHB/Wells Fargo Builders Confidence Index announced yesterday, was at a record low. In other words, builders, who are some of the biggest risk takers and optimists out there, are not feeling good about the situation.

It’s funny but with all the excess inventory out there, I find it hard to believe that builders continue to build, even at their “half full” output compared to 2006 levels. The decline in housing starts (which are fraught with crazy statistical problems to begin with) would likely be lagging the drop in demand as measured by inventory.

We really need a better national inventory figure.

Tags: Commerce Dept, NAHB, Fox, Census, Television

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Well this morning, I got up at 4:15am to do a live C-Suite interview on Fox Business News at 6:45am. Always fun and I enjoyed meeting Jenna Lee in person after having known her only via telephone when she was a reporter. I must have done ok since they invited me back next friday morning. 😉

Here’s this morning’s clip.

We talked about both housing starts and my appraisal firm, Miller Samuel. I had thought that the April numbers would show further decline. March was the lowest in 17 years and was down by 2/3 from the January ’06 high. Economists surveyed generally thought starts would be down around 1.4%.

Surprisingly, starts were up.

Starts jumped 8.2% but that was due to multi-family starts. Single family starts were actually down 1.7%. Overall starts are down 30.6% from the same time last year.

Bad Stats 101

Check out the Census’ press release quote:

Privately-owned housing starts in April were at a seasonally adjusted annual rate of 1,032,000. This is 8.2 percent (±14.5%)* above the revised March estimate of 954,000, but is 30.6 percent (±6.7%) below the revised April 2007 rate of 1,487,000.

Translation of up 8.2 percent (±14.5%): Overall housing starts were anywhere from -6.3% to +22.7%. Seems wildly vague, doesn’t it?

Single-family housing starts in April were at a rate of 692,000; this is 1.7 percent (±11.7%)* below the March figure of 704,000. The April rate for units in buildings with five units or more was 326,000.

Translation of down 1.7 percent (±11.7%): Single-family starts were anywhere from -13.4% to +10%. Seems wildly vague as well.

If you think about it, nothing has really changed since last summer’s credit crunch that would change the direction of the housing market.

• How can we talk about a bottom yet?
• What market force is going to get more people to buy right now?
• What economic force is going to stimulate demand as we approach or are in a recession?

The credit markets are still frozen, mortgage rates have risen, underwriting standards are higher and reduced the buyer power of consumers.

“The headline increase in starts means nothing; it is all due to a rebound in the hugely volatile, but essentially trendless, multi-family sector,” said Ian Shepherdson of High Frequency Economics.

Builders have been reluctant to build because demand for new homes has plunged and the supply of unsold property remained high. The latest data show new-home sales, for March, were down 36.6% from a year earlier. On Thursday, the National Association of Home Builders reported its index for sales of new, single-family homes slipped to 19 in May from 20. The gauge is based on a survey of builders asked about prospects for sales.

“The magnitude of the housing bubble was unprecedented, and the corrective process promises to be a long and painful one,” MFR Inc. Joshua Shapiro said of the NAHB data. “Hence, it is hardly surprising that builder sentiment is still languishing very near its all-time low.”

As far as Miller Samuel (my appraisal firm) goes, we have been booming since February. Fox Business inadvertently inserted a text banner during my interview that referred to our now defunct acquisition by RL from last fall. I had terminated the take-over in March.

Our firm is built for a down housing market because lenders as well as other clients actually want to know what the value is and the nuances of housing markets we cover, rather than only the number needed to make the deal. We did not fare as well as others during the housing boom because of the erosion of underwriting standards and the shift of appraisal work from retail lenders to mortgage brokers.

The current lending environment is encouraging, in a contrarian sort of way, by getting back to basics. Hopefully this will permeate the entire lending process.

The housing boom was tough for appraisers who refused to bow to pressure to push values higher than they should have been and the work was given to those who would.

But the world is changing, and like the IRS, we are here to help…

From the:

Who Cares But
It’s Still Cool Department:

Christine Haughney’s Collateral Foreclosure Damage for Condo Owners in the NYT yesterday that sourced and used us for background, was the most emailed article in the New York Times both yesterday and today. THAT is cool (to me). It was designated to be an A1 story but was bumped for the earthquake in China coverage.

Tags: Commerce Dept, NAHB, Fox, Census, Television, China

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First Quarter 2008: Graph of Homeownership Rates

Interesting how much homeownership rates vary by region. The midwest has the highest rate, yet they saw the least change in price appreciation during the housing boom. Markets in the west and northeast have the lowest rates (and the highest home prices).

Hmmm, let me see…. higher prices = lower affordability = lower home ownership rates = more creative financing.

Tags: Commerce Dept, Census

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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 sized graphic.

In the It’s Newer Homes That Stand Empty as Vacancies Rise by Floyd Norris the sharp increase in vacant houses are more heavily weighted toward new construction.

The Census Bureau reported that 2.9 percent of homes intended for owner occupancy were vacant at the end of the first quarter. That figure had begun to rise even during the housing boom, a little-noticed byproduct of the aggressive construction of homes encouraged by easy credit. Before 2006, that figure had never exceeded 2 percent.

The ease of credit combined with limited underwriting resulted in an excessive level of new construction to enter the market. That’s why the rental market is as weak as the sales market in those areas that were characterized by new development. The speculation drove development beyond the level of reasonable absorption causing investor units to enter the market as competitors to existing rentals.

Tags: Getting Graphic, Commerce Dept, Census, Absorption

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For every action, there is an equal and opposite reaction. In other words, for housing to reach a bottom, something has to happen to cause it to change direction.

Something has to change or improve. In other words, something has to get better before housing does.

Caroline Baum at Bloomberg, one of my favorite columnists, pens a witty take on the very notion that something needs to improve, in order for housing to improve called Snoozing in Econ 101 Is Hazardous to Your Health. She provides the hopeful statements made by many these days and applies good old Econ 101 logic to them – I embellish each point a bit as well:

Misleading logic is plentiful these days
Home sales won’t pick up until housing prices stop falling. What could possibly make people start buying again? According to the confused thinking above, prices will levitate spontaneously, encouraging buyers back into the market. Sales activity leads prices. Cart before the horse can’t move a market. You need activity.

Housing affordability has turned up, which is a harbinger of stronger sales ahead. Affordability is only up in the formulaic sense. Underwriting requirements are at a far higher level now than before so it is not apples and oranges. In other words, the buying power has been weakened by elevation of standards. This becomes a self-fulfilling prophecy because housing markets (think of it as collateral for mortgages) gets rattled by more conservative lending practices after it was built up by a sustained period without real underwriting standards.

Governments continue to interfere with the law of supply and demand; that’s to be expected. What’s surprising is that so many practitioners of the dismal science [Economics] can’t seem to get it right either.

Prices continue to slide

If we can all hang in there, the US population will have 700 million more people in 2100 and a good portion of the South Florida real estate market can finally be absorbed by then (call me optimistic).

Acronym of the week: YAWN: Young and Wealthy but Normal Better yet – my modification… PAWN: Poor and Worried but Normal

Tags: Commerce Dept, Census

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Today I was interviewed by BBC TV on the housing market, specifically relating to the new home stats released today by the US Commerce Department:

Sales of new one-family houses in March 2008 were at a seasonally adjusted annual rate of 526,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.

This is 8.5 percent (±16.1%) below the revised February rate of 575,000 and is 36.6 percent (±11.1%) below the March 2007 estimate of 830,000.

Of course the ±16.1% is a wacky margin of error but the trend is clearly down.

Inventory is declining but that looks to be meaningless because the Commerce Department does not go back and restate their figures based on canceled contracts which have been at high levels.

Perhaps the only ray of hope was data showing that inventories of unsold homes fell for the 12th consecutive month in March, an indication that builders are making some progress to get their inventories under control. However, with sales plunging even faster, the supply of homes on the market rose to 11 months, the most in 27 years. Inventories are likely understated as well because of canceled sales contracts.

Like a broken record, “its all about credit.”

Here’s the BBC broadcast (2:44).

Tags: BBC, Commerce Dept, Census, Television

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In professions that have a low barrier to entry like real estate brokerage, membership would be expected to responds fairly quickly to changes in market conditions.

I was inspired to create a chart (with hat tip to Bubble Meter) to show the trend.

I plotted NAR annual membership against houses under construction. I picked Census’ housing units under construction to represent activity (and the fact that I could get data back a while).

The sharp drop in construction probably suggests a sharp drop in NAR membership in the near future since it represents a metric for activity.

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

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The Commerce Department released its new residential construction stats and starts are down 28.4% below last year and permits are down 36.5%. This is consistent with the NAHB Builder Confidence stats released the day before:

I find it interesting to follow trade associations like the National Association of Homebuilders (NAHB), and observe how they present their take on the housing market. In one of the worst environments for construction in recent memory (hard to find either financing and buyers), optimism still prevails:

“Our surveys confirm what I’ve been hearing personally from builders across the country, which is that interested buyers are out there, but they are either reluctant to go ahead with a home purchase or they are unable to find mortgage financing they can afford,” said NAHB President Sandy Dunn, a home builder from Point Pleasant, W. Va.

I am guessing this is an understatement of the year, no?

The headline of the press release says: Builder Confidence Remains Unchanged In March.

Which makes it sound like a neutral market when actually confidence is almost at its lowest level in 23 years since the index has been published. Yes?

Builder confidence in the market for new single-family homes remained unchanged in March, according to the latest NAHB/Wells Fargo Housing Market Index (HMI), released today. The HMI held firm at 20, which is near its historic low of 18 set in December of 2007 (the series began in January of 1985).

To their credit, they provide constructive suggestions to fix the housing slump and even though there is sugar coating (they are a trade association, after all), they do not stray from the realities of the market. No?

This just in: NAR Chief Economist Named Among Top Forecasters for Accuracy. ????

I’m feeling a bit rhetorical today, yes?

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

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