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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:

1. [Area Contractors Battle Rising Cost Of Materials](http://www.tennessean.com/apps/pbcs.dll/article?AID=/20060327/BUSINESS01/603270334) 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.”

2. [Costs Stifle Construction Boom Builders Brace For Rise In Material Prices, Interest Rates](http://www.whittierdailynews.com/business/ci_3625851) 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.”

3. 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](http://www.realestatejournal.com/propertyreport/residential/20060227-morrissey.html) 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!

4. 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](http://www.nytimes.com/2006/03/27/business/27fed.html), 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, Absorption, John Mason, Solid Masonry

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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 lack of community within our profession. Jonathan Miller

A couple of days ago I was reading the most recent edition of Working RE, a quarterly publication put out by Editor, David Brauner and the folks at the Organization of Real Estate Professionals. This self-promoting publication focuses on issues concerning real estate appraisers, home inspectors, and well, self-promotion of the products and services they sell to these professionals.

In an article written by Mr. Brauner himself, [Best Of Show Taking Appraisal Industry Pulse [Working RE]](http://www.workingre.com/workingre/best-show-online.htm), he sums up some highlights of the most recently held annual Valuation Conference.

While the article touches on various items of interest, the very last summary jumped off the page and smacked me in the face, and I mean hard.

In the article David quotes Clark Gimple, IFAS of Texas, who said, “Appraisers badmouthing their own are fanning the flames and putting the profession in danger of losing its already damaged credibility.” Mr. Gimple goes on to say, “You don’t hear accountants, lawyers and doctors emphasizing the negatives in their profession. Even if they have contempt for one another, there is a professional code not to talk dirt in public. Appraisers should take a lesson from that playbook. Also, mortgage brokers, lenders, appraisal management companies and other clients need to know that like doctors, lawyers, etc., the appraiser is in charge of the appraisal. Do other professions allow their clients to set appointment times, turn-around times, fees and such? And you wonder why you get no respect.”

Now there is no doubt our industry has its fair share of “bad apples” and there is no reason we should not strive for progress. But maybe our profession is no worse than any other profession. We’ve all heard war stories and off color jokes about lawyers, doctors, politicians, real estate agents, undertakers and all kinds of professions. If the truth be told, most of us have shared such stories, including yours truly. Of course late night talk show hosts use many such jokes in their opening monologues and would shutter at the thought of giving up such easy and popular targets.

Reflecting on Mr. Gimple’s statements, I started thinking about various words associated with our industry and I decided to run a test. I googled a simple, positive statement, [“good real estate appraiser” [Google]](http://www.google.com/search?hl=en&lr=&q=%22good+real+estate+appraiser%22&btnG=Search) and to my great surprise, came up with 81,400 hits. While this many hits gave me great joy at first, I quickly discovered that most (no I didn’t read them all) were related to websites of self-promotion, rather than objective commentary about us or our profession.

So Clark is right. We appraisers do lack fundamental traits common to most professions, a sense of common cause and a code of mutual respect. Effectively, we fail to see ourselves at oneness with everything and with beauty all around us.

Tags: Soapbox Blog, John Mason, Solid Masonry

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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. Jonathan Miller

I’ll try and refrain from making this article about politics, which is nearly impossible in today’s world. Everything and everyone is accused of being either politically connected or politically motivated. Why, we even refer to proper dialog as “politically correct” rather than simply polite or respectful. Well here goes nothing.

In Chris Isidore’s recent article [Bush Quietly Reshaping the Fed [CNN/Money]](http://money.cnn.com/2006/03/02/news/economy/fed_bush_picks/index.htm) we find out that President Bush is shaping a lot more than the Supreme Court with his appointees. In fact, he may be messing with the “almighty dollar”. Mr. Isidore states “Once Bush replaces Vice Chairman Roger Ferguson, the only Democrat on the Fed’s board who resigned recently, four of the Fed’s seven governors will have taken office in 2006, and all seven will be Bush appointees.” He goes on to say, “That would make Bush only the third president to place all seven governors on the board, after Ronald Reagan in 1988 and Franklin Roosevelt in 1936.”

For the past several months I, like many others, was under the impression that the Federal Reserve was nearing the end of rate hikes. This was somewhat reassuring to those of us in the real estate and related industries, as a fair portion of our business volume is directly dependent upon mortgage rates, affordable mortgage rates to be specific. The statements coming from Greenspan when we were somewhere around the 10th increase, gave me the sense we were looking at one, two or maybe three more increases at most. I confess I’m one of those who strongly believe Mr. Greenspan is inclined to go one or two adjustments too far. Although I don’t claim to be nearly as smart as Greenspan is. So, I was downright relieved to know the end was near. But when the 11th and 12th increases were quickly followed by the 13th and 14th, I began to ask myself, what the hell do these people see coming at us? Is there some giant meteor way out in space hurling towards earth?

Now we find out we’re about to be chauffeured by a young, less experienced team who is even more inclined to over-steer the monetary supply. It sounds like a teenager just given a license to drive, with all the ambition in the world and just enough know-how to get somebody killed. My cautious concern is now giving way to downright fear. What I thought might be a healthy readjustment from strong price appreciation, as in softer increases or even modest but manageable declines, is turning to gloom.

(I can’t help myself, but here is where it gets political.) Now those haunting words from our president, in the early days of the aftermath of Katrina, ring louder and louder in my head, “Brownie, you’re doing one heck of a job.”

Tags: Soapbox Blog, John Mason, Solid Masonry

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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. This week he gets more “big picture” on us, discussing the state of the tenant in the Big Apple. Here is his weekly post called Solid Masonry. Jonathan Miller

In a recent New York Times article, [Tenant’s Say They’re Lost in Dust of Conversions](http://www.nytimes.com/2006/02/27/nyregion/27conversion.html), by Charles V. Bagli and Michael S. Schmidt, it becomes all too clear how the balance of power has shifted in the world of New York City real estate. Bagli and Schmidt reveal the vulnerability and plight of many rental tenants in today’s environment. The laws have changed, the economic stakes are greater than ever and the new creed is as unapologetic and one-sided as the old one was. In the article the tenants are cast aside, with little or no recourse and it becomes clear the balance of power lies firmly in the hands of the landlords. As a result, the appraisal industry continues to readjust its analysis of projected rent rolls and gross sell out values with an equally aggressive view of the upside potential of such properties

In the 1980’s the mere presence of better known names like Donald Trump, Larry Silverstein, William Zeckendorf and many other real estate moguls sent shock waves through the various communities they saw fit to impose their projects upon. (That sounded a little more ominous than I intended, but a little drama is good.) These giants leaped from project to project, each leaving his/her signature on the New York City real estate landscape. Among these giants, there were nameless titans with power so great they were able to stop multi-billion dollar projects dead in their tracks. These titans were not necessarily affluent, highly educated or even well connected. At times they comprised a somewhat odd cast of many, but quite often they numbered no more than one or two individuals. Their motives and tactics could be angelic, materialistic or down right confusing. Not long ago these nameless powerhouses of the New York real estate world were rent stabilized and controlled tenants.

Remember the days when skyscrapers were built around a single tenement building, containing one lowly tenant? How about the numerous conversion attempts thwarted by well organized tenants waiving their “no buy” pledges? And how many stories did we see in the media exalting the David and Goliath type tales of tenants receiving such favorable treatment within the New York City court system? It almost seemed a patriotic duty to stand up for the little guy.

What a difference a decade or two makes. In less than 20 years the political and legal climate has shifted almost 180 degrees. So startling is the change, it would seem we have a new religion, which has spread far and wide. This may explain why everything including cruise ships seems to be going condo, why the Supreme Court recently ruled against the ownership rights of individuals on behalf of a large private enterprise and why the City of New Orleans may never be rebuilt as it was. What makes this even more amazing is this transformation has also taken place in one of the most liberal bastions of the nation, New York City. It has always been a city of stark contrasts, but they were hidden amongst the many subtle shades of gray. Likewise New York has always been a city full of Davids and Goliaths. Though now it becomes all too clear, the slingshot is no match to the hammer.

Tags: Soapbox Blog, John Mason, Solid Masonry

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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. Jonathan Miller

Steve Bergman’s recent article in Barron’s, [Distressful Opportunities](http://online.barrons.com/article/SB114023016631477757.html?mod=9_0002_b_this_weeks_magazine_home), reveals a troubling trend in the lending industry. At a time when the real estate market has enjoyed some of the best years on record, it seems some lenders are looking to divest themselves of underperforming loans. While this makes perfect sense in declining markets with no upside potential on the horizon, it’s rather peculiar in the heat of such a strong market. Furthermore, when properties are over-leveraged or LTV’s (loan to value ratios) run close to 100%, lenders may be prudent in shedding themselves of bad loans with little chance of being repaid. But take a look at the following example cited by Bergman:

Gelt Financial, a small real-estate lender based in Southampton, Pa., recently bought the $190,000 mortgage on a five-unit Trenton, N.J., apartment building for $175,000. The property had an estimated value of $475,000, but the borrower was slow making payments and the lender decided it would prefer to sell the mortgage, rather than badger the owner, month after month.

The new note-holder offered the owner a deal: If he made regular payments for the 36 months and refinanced for 36 months, he would pay zero interest. What’s the catch? Gelt already had locked in a profit by buying the $190,000 note at about an 8% discount. And if the borrower, despite the easier terms, nonetheless defaulted, Gelt could take control of a property worth almost a half-million dollars.

In short, we have a lender discounting an asset 8% to facilitate its sale, with a 40% LTV and in a strong market! Now I don’t want to make it sound like the mortgage securities industry in about to collapse. As we all know foreclosures represent a small portion of the outstanding loans. But if this example is representative of even a fraction of the underperforming assets, then there should be alarms ringing in the halls of the Federal Reserve. For that matter, bells should be ringing throughout the land. Why? Well if commercial lenders are feeling in a bind with such favorable terms on their side; imagine their reaction when faced with terms which have become all too common on the residential side of the aisle. As buyers have been priced out of housing markets the lending industry has become more creative in offering loans with little or no money down, LTV’s approaching and even exceeding 100% and introductory “teaser” rates, while accepting borrowers with less than perfect credit scores, no income verification, and so forth. Sometimes these “exceptions” are done in concert with one another.

If residential lenders start dumping underperforming loans, hold on to your hats, for we have some high hurdles to clear in the next couple years. Especially if inventories continue to climb, energy costs remain defiantly high or changes to the tax laws turn unfavorable for homeowners and real estate investors. While real estate prices have always trended upwards in the long run, everything goes through cycles and it will be interesting to see how the lending industry reacts to the next downturn in the market. If lenders are bailing in a good market, then there could be trouble in paradise and sooner or later these chickens may come home to get roasted.

Tags: Soapbox Blog, John Mason, Solid Masonry

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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. Jonathan Miller

“Ameriquest Mortgage Co.’s recent $325 million lawsuit settlement with 49 state governments suggests all isn’t well in [the] home-loan industry.” But if you read between the lines, it may also not be well for the venders who service these lenders.

As indicated in the recent article [Cleaning Up Subprime Mortgages [Boston Herald]](http://business.bostonherald.com/realestateNews/view.bg?articleid=125620&format=text) it becomes all too clear just how far some members of the lending industry might have to go to make things right. And the sad truth is Ameriquest isn’t alone. While Ameriquest denies any wrongdoing, the settlement attempts to correct numerous issues concerning the application, processing and settlement of mortgages.

For one thing Ameriquest has agreed loan officers must also provide good-faith estimates of closing costs in a timely manner – and can’t “disparage, discredit or otherwise encourage (borrowers) to disregard” these figures.” In short, Ameriquest will have to adhere to the estimates they provide. It’s well known throughout the lending industry that some banks and mortgage brokers understate the good-faith estimates when borrowers are applying for loans. The technique steers borrowers away from honest lenders who are unwilling to play the “bait and switch game”. Some individuals claim these fraudulent estimates represented less than half the funds needed to close the loan. In addition, lowball estimates can be used to make higher lending rates look more attractive.

To be sure, this deceptive practice is a major issue for both consumers and honest lenders. But wait, national lenders smell a marketing opportunity, especially in light of a slowdown in mortgage applications during the past several months. In Kenneth R. Harney’s [A Good-Faith Effort To Clean Up Estimates [Washington Post]](http://www.washingtonpost.com/wp-dyn/content/article/2006/01/27/AR2006012700706.html) he spells out how SunTrust and LendingTree have recently announced programs where they too (without any allegations of wrongdoing) will guarantee good faith estimates, in an attempt to lure more borrowers.

So what does all this have to do with venders? Well if this trend catches on, either through legal settlements, revisions to the laws pertaining to lender requirements or from promotional programs aimed at increasing market share, it will force lenders to sharpen their pencils. And guess who they’ll turn to? The easiest and most cost effective option is to ask the outside venders to lower their fees, as it requires nothing of the lenders and only impacts the profitability of the venders themselves. Only as a last resort will the lenders consider reducing their internal fees or profit margins.

While increased efficiency and reduced costs are good for consumers, the race to the bottom, in terms of vender fees, could further compromise the quality of services provided. At a time when real estate deals are becoming more complex and technical and many real estate markets are in some sort of transition, this could prove unwise and lacking in good faith.

Tags: Soapbox Blog, John Mason, Appraisal Process, Mortgage Fraud, Redlining and Predatory Lending, Solid Masonry, Appraisal Fees

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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 inaugural weekly post called Solid Masonry.

Jonathan Miller

This past Sunday the New York Times ran an article [Talk About Renting a Hole in the Wall](http://www.nytimes.com/2006/02/03/nyregion/03mattress.html?_r=2&oref=slogin&pagewanted=print) in which a group of architectural students stumble upon an experiment which reveals just how hot, or desperate, the New York City housing market really is. Up late one night (perhaps a little too late) the three students amuse themselves by stuffing a mattress into a transom over a bedroom doorway. Having decided it was “not half bad” in terms of comfort; one of them posts an ad on Craigslist to see if anyone else would find interest in the “elevated mattress” at $35. In a city where most of us think we’ve seen it all, it should be no surprise that about a dozen people responded to the ad. While the students never followed through on actually renting out the space, they are clearly on to something.

And like others in real estate, I’ve seen my share of “creative” housing, including:

• A storefront with 9-10 mattresses laid out on the floor of the basement and offered as partial compensation to the workers of the restaurant above. While I was never given a dollar amount for the “compensation”, I was told that use of the single toilet and sink at one end of the basement, which was shared by all, was included.
  
• While inspecting a house in a nice suburban neighborhood, I opened a hall closet (about 3 feet deep and 8 feet long), only to find a few clothes hanging on the rod. Upon looking down I spotted a twin size mattress on the floor, to which the owner smiled and said she ‘ran out of bedrooms for her kids’.
  
• And my personal favorite was a single family home divided into many small rooms. Each room had a bed and most beds were occupied. The owner boasted how some of his tenants had “sublet” their rooms, in 12 hour shifts. While there was a small surcharge to these enterprising individuals (supposedly for the added use of the common kitchen and bathrooms, the landlord was proud that of his tenants had found a way to reduce their own weekly rents.
  

To be clear, we never completed any of these appraisal assignments, as the loan was dead once the lender realized there was illegal use of the properties. (Or more likely, once they realized we were not willing to overlook the illegal use.)

But this brings the meaning of “highest and best use” to a whole new level. Let’s face it, the motivation here is much higher rates of return, legal or otherwise. As and example, an apartment can be rented at $1,800 per month to one tenant, or it can also be rented at $3,225 per month to six individuals ($125 per week x 6 people x 4.3 weeks per month = $3,225). It makes sense some landlords are willing to take greater risks in return for equally greater rates of return, especially in light of the high price of investment properties, when compared to the low rates of return on investment under a conventional (legal) rental analysis.

The fact is there is an urgent need for truly affordable housing, no matter how unsafe or unreasonable the conditions might be. When the incomes of poor individuals and families are unable to keep pace with legal rents, the market has demonstrated they are clearly willing to accept less in return. Much less! Wouldn’t a city like New York be better off promoting the development of safe and clean SRO’s, rather than ignoring such sheer demand? Shouldn’t there be consideration for the development of smaller units, even if they don’t meet current “standards”? I’m talking about building new complexes with single rooms, no bigger than 5′ x 10′, with small Pullman style kitchens and maybe a toilet in a closet.

At some point we need to stop debating about what people want and start providing them what they need. If three architectural students in a late evening lark can create such a simple test to demonstrate how desperate the housing crisis is, shouldn’t we as a society rise up to the challenge and meet such a glaring need?

Tags: Soapbox Blog, John Mason, Solid Masonry

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Appraiser John Philip Mason writes in:

I can’t help but wonder if the stock market will do better if the real estate market cools off.

It’s easy to understand why people are investing greater sums of money in a real estate market with double digit returns, while the DJIA and other indexes have been pretty flat for the past few years. Especially when you consider that most securities can only be purchased with up to a 50% margin (if at all), but some real estate deals are being financed at up to 100%.

Tags: John Mason

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