Matrix Blog

A quick shout out to Sam Chandan at Real Estate Econometrics for his invite to me to speak to his MBA real estate class at Wharton last Monday. A lot of fun and no tomatoes thrown. Added bonus, they have Au Bon Pain as snack shop.

[click to expand]

The widely held belief that houses were used as ATM’s during the credit boom is a valid assumption given the massive withdrawal of home equity. Of course that parallels mortgage lending and as a result, housing activity boomed over the same period.

With the post-Lehman credit crunch, millions of homeowners can’t refinance their mortgages or obtain a mortgage for a purchase. The contraction in credit has choked off the high pace of sales activity our economy has grown accustomed too. Yet sales and prices appear to be leveling off after a steady decline.

Q: Who’s buying these homes?
A: People that can actually afford and qualify for a mortgage.

According to a recent public policy discussion paper from the Federal Reserve Bank of Boston by Daniel Cooper Impending U.S. Spending Bust? The Role of Housing Wealth as Borrowing Collateral

house values affect consumption by serving as collateral for households to borrow against to smooth their spending….house values, however, have little effect on the expenditures of households who do not need to borrow to finance their consumption.

In other words, the segment of the consumer market that needs to borrow to spend, aren’t spending now. That doesn’t mean “no one is spending” – this is the cause for significant confusion in interpreting the health of our current economy.

For those who borrow to spend

The results show that the consumption of households who need to borrow against their home equity increases by roughly 11 cents per $1.00 increase in their housing wealth.

During the housing boom, the excess demand was simply fueled by those who had to excessively borrow to spend. It doesn’t mean that everyone had the same thinking.

Back to basics.

Tags: Lehman

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In reference to my New York Times quote this weekend by Vivian Toy – Bidding Wars Resume:

Jonathan J. Miller, the president of the appraisal firm Miller Samuel, estimated that two-thirds of the roughly 4,000 [8,389] apartments for sale in Manhattan are priced too high for the current market.

“So,” Mr. Miller said, “you have this weird situation right now where you have above-average inventory, but people are fighting over the ones that are priced correctly.”

(I’m not sure where the 4,000 number came from because Manhattan 3Q 09 showed 8,389 but the specific amount is irrelevant.)

The difference between a bidding war of two years ago and the current market is the irrational nature of bidding wars back then – it was all about “winning.” The market today is about obtaining value – with prices having fallen an average of 25% since pre-Lehman.

Also, there is a larger disconnect between buyers and sellers than a few years ago as measured by the lower pace of sales. There was a reprieve this summer when sales surged, but listing inventory is still above average levels and a higher level of listings are priced above market level leaving purchasers fighting over a smaller selection.

Although this is anecdotal, I do believe that there are fewer bidding wars that occur above list price than we saw a few years ago.

When my friend and bigger than macro Big Picture blogger Barry Ritholtz refers to me as “Our man Jonathan Miller drops the truth bomb” I am confident I nailed the current state of bidding wars.

Tags: Barry Ritholtz, Big Picture Blog, Lehman

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The 3Q 2009 Brooklyn Market Overview that I author for Prudential Douglas Elliman was released today.

Other reports we prepare can be found here.

The 3Q 2009 data and a series of updated charts are available.

Press coverage can be found here.

An excerpt

…The number of sales for the quarter surged for the second consecutive quarter, rising 29.3% to 1,847 units from 1,428 units in the second quarter. Despite the increase in activity, the number of sales were 19.6% below the 2,298 number of sales in the prior year quarter. The jump in the number of sales from the prior quarter reflects a release of pent-up demand from an unusually low level of sales activity seen in the early part of the year that began with the Lehman bankruptcy tipping point on September 15, 2008. As a result of the increase in activity, listing inventory has fallen sharply but remains above typical levels. There were 5,600 properties listed for sale, down 21.2% from the prior year quarter total of 7,103 units and down 11.5% below the 6,330 listings in the prior year quarter. The decline in listings from the prior quarter reflects the surge in activity which had the effect of eroding inventory levels. The decline of inventory levels from the prior year quarter despite the drop in the number of sales over the same period. This inventory decline was caused by individual sellers removing their listings from the market in hopes of relisting when conditions improved…

Download 3Q 2009 Brooklyn Market Overview

Tags: Lehman

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[click to expand] source: Calculated Risk

On Thursday (in about an hour) we are releasing our 3Q 2009 Manhattan Rental Market Overview. In the meantime, the REIS report is a wake up call to the economic realities of the apartment market in New York and the US.

The U.S. vacancy rate reached 7.8%, a 23-year high, according to Reis Inc., a New York real-estate research firm that tracks vacancies and rents in the top 79 U.S. markets. The rate is expected to climb further in the fall and winter, when rental demand is weaker, pushing vacancies to the highest levels since Reis began its count in 1980.

This is the seventh straight quarter where less space has been rented. Net effective rents (face rent less concessions like free rent and payment of commissions) has fallen sharply since the Lehman bankruptcy. REIS sees vacancy rates peaking in a year and rents declining through 2011.

Why? Rising unemployment and 7.2M jobs lost in the recession so far.

New York vacancies jumped to 11.4 percent in the third quarter from 6.6 percent a year earlier, and the city’s effective rents tumbled 18.5 percent, Reis said.

The drop in rents is about twice the decline New York experienced in 2002, following the Sept. 11, 2001, terrorist attacks. Rents fell 9.3 percent that year, Calanog said.

That’s why landlords are aggressively focused on tenant retention. The New York balcony BBQ conversation is dominated by “how much the landlord knocked off the rent to get me to renew.”

Pollyanna has moved out.

Tags: Lehman

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It’s time to share my Three Cents Worth on Curbed, at the intersection of neighborhood and real estate.

Finding the bottom v. turning the corner…

The combination of these metrics suggest that things are not deteriorating as quickly as they had been since the 9/15/08 Lehman tipping point, but it still doesn’t show that we have found some sort of bottom for the Manhattan housing market.

Click here to view this week’s post.

Check out previous Three Cents Worth posts.

Tags: Three Cents Worth, 3CW, Lehman

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Confidence is more right here and now. Sentiment is more forward looking (it gives a snapshot of whether consumers feel like spending money.)

(a lame appraisal analogy would be estimated market value for a bank appraisal (today) versus anticipated sales price for a relocation appraisal (future))

but I digress…
I continue to be amazed with the types of analysis being done with the subjective nature of what is on the consumer’s mind – or in this case, what journalists are writing about:

The Dow Jones Economic Sentiment Indicator

The ESI, which was first published in April, aims to identify significant turning points in the U.S. economy by analyzing coverage of 15 major daily newspapers in the U.S.

The Dow Jones Economic Sentiment Indicator bottomed last November and has continued to edge higher. Newspaper coverage has become more upbeat about the economy (I assume they assume that consumers are sick of reading about bad news), the number of articles expressing either positive or negative sentiment about the economy has fallen now to approaching a third of the level of its peak in October 2008 following the collapse of Lehman Brothers.

A lot of people are drinking the Kool-aid right now.

I find this particularly ironic since the real estate industry has long blamed “the media” for the making real estate correction worse by “piling on.” However, I find the coverage today to be overly positive from sloppy interpretation of the 4 housing price indices: Case-Shiller Index, NAR Existing Home Sales, Commerce Dept’s New Home Sales and FHFA HPI, showed positive signs.

Actually all indices showed less negative results which were discussed excessively positive.

For example, The Conference Board’s recent Consumer Confidence Index was a little more positive:

Consumers’ assessment of current conditions improved slightly in August. Those claiming business conditions are “bad” decreased to 45.6 percent from 46.5 percent, however, those claiming conditions are “good” decreased to 8.6 percent from 8.9 percent. Consumers’ appraisal of the job market was more favorable this month. Those saying jobs are “hard to get” decreased to 45.1 percent from 48.5 percent, while those claiming jobs are “plentiful” increased to 4.2 percent from 3.7 percent.

While the recent Michigan Sentiment Index showed renewed weakness:

Confidence among U.S. consumers unexpectedly fell in August for a second consecutive month as concern over jobs and wages grew.

The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 63.2, the lowest level since March, from 66 in July. The measure reached a three-decade low of 55.3 in November.

I find the whole thing a bit foggy especially using monthly figures for comparison.

Further reading on this.

Tags: Case-Shiller, FHFA, Pending Home Sale Index, PHSI, Lehman, NAR, National Association of Realtors

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Our commercial advisory firm just released the Manhattan Building Sales Report prepared in conjunction with Massey Knakal, a leading commercial real estate brokerage firm.

My commercial valuation partner John Cicero, MAI in our firm Miller Cicero oversees the report preparation. The report is the only one of its kind that tracks cap rates, income multipliers, price per square foot and number of sales.

The format has changed to quarterly and the expanding series will be more borough-specific.

An excerpt:

The first quarter of 2009 property sales market in Manhattan is characterized by a dramatic slowdown in sales activity. This is the first period tracked that truly reflects the market mentality created in September 2008 with the collapse of Lehman Brothers, the federal bailouts of AIG, Fannie Mae and Freddie Mac, and the ensuing paralysis of the credit markets throughout the fall. (In contrast, our last market report for the second half of 2008 included numerous sales that were negotiated pre- September)…

Massey Knakal will distribute nearly 300,000 hard copies of the report over the next few months.

Massey Knakal Manhattan Building Sales Report [1Q09]

Report Methodology [Miller Cicero]

Tags: Massey Knakal, Miller Cicero, Lehman

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Guest Appraiser Columnist:
Jim MacCrate, MAI, CRE, ASA
MacCrate Associates
Appraisal & Valuation Issues Blog

Jim has worn many hats including a Director at PricewaterhouseCoopers in New York City and Chief Appraiser at European American Bank. He is a prolific writer on valuation issues and teaches a number of the real estate appraisal classes through the Appraisal Institute and New York University. I have had the pleasure of taking a number of courses taught by Jim.
…Jonathan Miller

Many so called real estate experts have been predicting the bottom to the real estate market will occur in late 2009 or early 2010. No one can predict with any degree of accuracy the future, much less the bottom of the real estate market in any metropolitan area. It is important for real estate professionals to remember that real estate markets vary by location. Some markets will do well while others are doing poorly. For example, the Detroit real estate market was depressed long before the recession was declared official by the federal government and the beginning of the decline in the New York real estate market. The real estate market in the New York metropolitan area has been driven low interest rates and by the growth of the financial, insurance, and real estate sectors of the economy which began in earnest in first quarter of 2004 as indicated in the following chart:

Total employment is now falling with the FIRE and construction sectors of economy taking a big hit in employment beginning with the collapse of Lehman Brothers. Real estate salespeople, brokers, and appraisers must stop listening to the noise from Washington, D.C., politicians, and others who have mislead us in the past. What we are witnessing, the economists and politicians have witnessed this before during the late 1920’s, the late 1950’s and early 1970’s. In order to properly value real estate, one must cut out all the outside noise and analyze carefully what the local real estate market data is telling you.

On a Macro Basis the Indicators are all Negative

The recent indicators reported by the government suggest that the economy is improving because the rate of unemployment is declining, consumer confidence is improving, the rate of decline in manufacturing is subsiding, etc. All of the above and other statistics still suggests that economy is not improving and real estate values will not begin to rebound until the economy turns over and employment begins to increase with an increasing payroll income and wealth. That is not bound to happen for awhile.

In the New York Metropolitan area, the leading indicators for increasing real property values are all declining, including the following:

• Population is stabilized or falling
• Number of households has stabilized or is declining
• Total employment is declining
• Total payroll/income is declining
• Consumer confidence is negative
• Businesses are still contracting including manufacturing, retail and the financial services sectors of the economy.

The results of the 2010 Census should be interesting nationwide. Listen to what the leading indicators are telling you about the macro market.

Now, on a Micro Basis

Real estate is fixed and immobile. The value of real property is driven by local indicators which impact the demand for real estate in a specific location. All the macro indicators referred to above are also negative in the New York Metropolitan area. In order to determine if the real estate market is rebounding versus stabilizing at a much lower level of activity and prices, the following factors should be analyzed carefully in addition to the factors that generate demand:

• Sale price trends
• Increase/decrease in the number of sales
• Increase/decrease in the number of listings for sale
• Increase/decrease in the number of days on market
• Increase/decrease in sales concessions
• Response to for sale or for lease advertisements
• Increase/decrease in the number of foreclosures
• Increase/decrease in the number of loan defaults.

These trends are extremely important to watch, but the trends will not reverse until consumer confidence is positive and total payroll/income, employment and the number of households is increasing. It must be remembered that real estate prices remained depressed for several years after the recessions of the 1970’s and 1980’s. Why should this time be any different, and, in fact, it is already worse in many markets.

Tags: Europe, James MacCrate, Commerce Dept, Census, Appraisal Institute, Straight from MacCrate, Lehman

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The 1Q 2009 Manhattan Market Overview that I author for Prudential Douglas Elliman was released today.

Other reports we prepare can be found here.

The 1Q 2009 data and a series of updated charts are also available.

Press coverage can be found here.

An excerpt

…Last fall’s rapid change in market conditions established a new housing market that reflected a lower level of activity and a reset of housing prices. The tipping point, which occurred last September at the bailout of Lehman Brothers and bailouts of AIG, Fannie Mae and Freddie Mac, marked a sharp contraction of credit, greatly restricting demand as participants had more difficulty obtaining financing. A national recession, rising unemployment and reduced compensation in the financial services sector also played a role in restricting demand. The market reset caused sellers to be more than a year behind the current market, still setting list prices in relation to the last high water mark in their respective buildings. This resulted in the expansion of inventory, listing discount and days on market metrics…

Download 1Q 2009 Manhattan Market Overview

Tags: Bailout Nation, Lehman

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Sorry but I am in Manhattan Market Overview high gear prep mode – the report will be published later this week – so I am pretty lame on the content side for Matrix at the moment.

One of my semi-regular podcast downloads is Russ Robert’s EconTalk. This week he interviews Nassim Taleb , the author of Fooled by Randomness and the Black Swan of a few years ago. I own the latter, but I think the former is over my head. I’ve never heard him speak before. I have now listened to this podcast 3 times already and thoroughly enjoyed it. Also make sure you read the slew of comments posted to their site.

Nassim Taleb talks about the financial crisis, how we misunderstand rare events, the fragility of the banking system, the moral hazard of government bailouts, the unprecedented nature of really, really bad events, the contribution of human psychology to misinterpreting probability and the dangers of hubris. The conversation closes with a discussion of religion and probability.

On one hand I am very leery of people who suggest they have all the answers to a problem but not the solutions – Nouriel Roubini is another example – but Taleb’s arguments are compelling. After all, I think we all want to understand how so many smart people could be so utterly stupid for so long. If it wasn’t mortgages as a vehicle, it would have been something else.

I loved the ten year flood example given in the notes of the interview:

A ten year flood has a higher probability than a 100 year flood, but the 100 year flood will be massively more consequential. You care about the probability times the size of the impact, the expectation of these events. Small-probability events can have in some domains, fat-tailed domains, a big impact and we don’t know how to estimate them.

Here’s the compensation scenario and moral hazard – notes from the interview:

Were heads of Bear Stearns and Lehman Brothers not aware of how much they were gambling or did they not care how much they were gambling? Combination. Three things: 1. fooling themselves, psychological dimension. 2. Had an interest in building huge risks and tail because if you blow up every 10 years, you will make 9 bonuses and the 10th year someone will pay the cost, not you. Vicious: taxpayers are paying retrospectively for the bonuses of the first 9 years. Banks are insolvent, have lost more than their capital base, but managers have kept their bonuses. Some of them have been wiped out because they went a little further than normal blow-up cycle. What about the ones who didn’t do it? Lower returns year after year; now should be doing extremely well, but now unable to buy up some of the firms that have made the mistakes because the government is propping them up.

Aside: Speaking of dumb, how about the new space station named “Colbert” and video. To see the vote page and the number one suggested name – go here.

Tags: Bear Stearns, Bailout Nation, Lehman

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Our commercial advisory firm just released its New York City Income Property Market Report for the second half of 2008 for Massey Knakal. My commercial valuation partner John Cicero prepares the report. It’s the only report of its kind that covers the New York City commercial market.

Here’s what he says:
The Massey Knakal Income Property Report that I prepare on behalf of the brokerage firm was just released for the second half of 2008. The report is the only one of its kind that tracks cap rates, income multipliers, price per square foot and number of sales for the New York City multi-family market. As this report included only those sales (above $500,000) that closed from July 1 through December 31, it includes sales closed before and after the market turn in mid-September, when Lehman collapsed and the credit markets seized.

An excerpt:

The number of sales dropped 45% from the second half of 2007 to the second half of 2008. Relative to the prior year the greatest declines were in Manhattan and Northern Manhattan, both down 54%, and the Bronx, down 60%. Year over year there were 37% fewer sales in 2008. This suggests a turnover rate of 1.9%, down from 3.0% in 2007 (of the categories tracked).

Massey Knakal will distribute nearly 300,000 hard copies of the report over the next few months.

Massey Knakal New York City Income Property Market Report [2H08]

Report Methodology [Miller Cicero]

Tags: Massey Knakal, Miller Cicero, Lehman

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The missing ingredient today in the housing market, the economy and the financial system is trust.

• Banks won’t lend to each other because each thinks the other is going under.
• Bank won’t lend to conumers because they don’t think they can pay the loan back.
• Consumers don’t trust the government because just 6 months ago they pronounced that the economy has strong fundamentals.
• Buyers don’t trust the local housing market because they think it is going to collapse.
• No one trusts anyone.

Like consumer confidence, trust is a key factor in all that is wrong with the economy.

While trust is fundamental to all trade and investment, it is particularly important in financial markets, where people depart with their money in exchange for promises. Promises that aren’t worth the paper they’re written on if there is no trust.

Kellogg School of Management at Northwestern University and The University of Chicago Booth School of Business have developed the Chicago Booth Kellogg School Financial Trust Index.

A Trust Crisis Paola Sapienza and Luigi Zingales1

If a modern Rip Van Winkle had fallen asleep two years ago and woken up now, he would wonder what had happened to the U.S. economy. Two years ago, we were in the middle of an economic boom. Banks were eager to lend even at the cost of forgoing important covenants, and corporate America (and the entire world) was producing at full steam, so much so that commodities prices were rising in anticipation of a future scarcity. Today we are quickly sliding into a deep recession. Banks are not lending and commodity prices are plummeting in expectation of a dramatic slowdown of production throughout the world.

Neoclassical economic models cannot explain this dramatic change. There was no apparent shock to productivity nor a clear slowdown in innovation. The government has kept taxes low. The Federal Reserve has kept interest rates low and cut them even further. What happened?

Everyone agrees that this crisis originated in the financial system. When Lehman Brothers defaulted and AIG had to be rescued by the government in September, the economy was still doing all right. The rate of growth during the second quarter was still a comfortable +2.8 percent. How could the default of an investment bank, with very limited lending to the real economy, have had such a disastrous effect?

Tags: Lehman

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