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Posts Tagged ‘NAR’

Appraisal Journal Study Cites Flaws In Zillow AVM

March 3, 2010 | 2:38 pm |

[click to open report]

Zillow has been one of the most visible and talked about AVMs (Automated Valuation Models) in the US and enjoyed considerable press during the housing boom. Of course they have always been at the mercy of the quality of public record data despite their technology prowess.

Perhaps they were more guilty of overhyping the reliability of their “Zestimates” in the early days by presenting value estimates precisely down to the dollar. But hey, it was cool to see how much your neighbor’s house was worth.

There was an interesting article in Valuation Review (subscription) and HousingWire.

The study concludes that:

Zestimates on Zillow.com are no more accurate than homeowner’s estimates.

When it comes to using the Zillow.com automated valuation model (AVM) to get a free listing price on a house, users may be getting what they paid for, according to a report published by the Appraisal Institute that finds the Web site overestimates the values on homes almost as often as the actual homeowners.

Zillow has become the real estate punching bag to the real estate community. And once again, they are on the defensive in the media coverage of this report.

Here’s the issue:

The key issue regarding Zillow’s Zestimates is whether they reflect transaction prices. Zillow has been described both as “a useful site” and as “categorically wrong.” There have been many instances of praise and many instances of complaints by homeowners using the Web site to estimate the value of their homes. Realtors in general have also been critical of the values produced by Zillow.

Agents had issues with over valuation because they tended to set seller’s expectations too high. Of course, appraisers have an ax to grind with a service that was perceived to trivialize their expertise in valuation.

The report, “Zillow’s Estimates of Single-Family Housing Values,” was authored by Daniel Hollas, Ronald Rutherford and Thomas Thomson, doctors in economics, real estate and business, respectively. The report was published in the quarterly technical and academic publication of the Appraisal Institute, the nation’s largest association of real estate appraisers.

View the report.

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[AVPO] Another Valuation Pseudo Offering: “Appraiser Assisted BPOs”

February 21, 2010 | 6:18 pm |

Last week the appraisal community was up in arms about a $55 “appraisal” product that was an appraisal but no self-respecting appraiser could complete the report completely, be USPAP compliant and still make a meager living. The consensus is that it will attract shysters and promote short cuts. There is a rabid discussion forum on this topic right now on LinkedIn if you are a member of the group.

A new product by First American has now appeared which is explained in technicolor by Tyler King, our resident Phish fan and hipster over at Commercial Grade called an AVPO:

So to recap: The (licensed) appraiser looks at a set of comps, from these comps logical adjustments are made, and the appraiser formulates a value opinion. Yes…I see…that sounds nothing like an appraisal.

aside: First American owns eAppraisIT, who’s slogan on their web site, incredibly, is “Redefining Value.” For those who may have forgotten, NYS AG Andrew Cuomo filed suit against eAppraisIT back in 2007 for conspiring with Washington Mutual to inflate real estate appraisals.

First American claims “this is not an appraisal” to which the Appraisal Foundation replies:

While it is not within our purview to determine whether any particular product or service complies with USPAP, we can tell you that, as far as USPAP is concerned, the product appears to qualify as an appraisal or an appraisal review assignment. The press release states, in part:

“While this is not an appraisal, a licensed appraiser confirms the specific set of values determined by a local Realtor® by looking at comparable sales and verifying accuracy. If discrepancies are found, the appraiser provides a new set of values, complete with an explanation of how they were determined.”

If an appraiser is required to comply with USPAP (such as a licensed appraiser in a state that mandates such compliance), the above product would have to comply with STANDARDS 1 and 2, or STANDARD 3.

Best regards,

John S. Brenan
Director of Research and Technical Issues
The Appraisal Foundation
www.appraisalfoundation.org
(202) 624-3044


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Appraisers and Foreclosure Sales Bring Havoc to Housing Markets

January 29, 2010 | 12:30 am | | Articles |

I authored the following article for RealtyTrac which appeared on the cover of their November 2009 subscriber newsletter called Foreclosure News Report. It features a column for guest experts called “My Take.”

When Rick Sharga invited to write the article, he provided the previous issue which featured a great article by Karl Case of the Case Shiller Index and I was sold.

I hope you enjoy it.



Appraisers and Foreclosure Sales Bring Havoc to Housing Markets
By Jonathan Miller
President/CEO of Miller Samuel Inc.
11-2009

In many ways, the quality of appraisals has fallen as precipitously as many US housing markets over the past year. Just as the need for reliable asset valuation for mortgage lending and disposition has become critical (fewer data points and more distressed assets) the appraisal profession seems less equipped to handle it and users of their services seem more disconnected than ever.

The appraisal watershed moment was May 1, 2009, when the controversial agreement between Fannie Mae and New York State Attorney General Andrew Cuomo, known as the Home Valuation Code of Conduct, became effective and the long neglected and misunderstood appraisal profession finally moved to the front burner. Adopted by federal housing agencies, HVCC, or lovingly referred to by the appraiserati as “Havoc” and has created just that.

During the 2003 to 2007 credit boom, a measure of the disconnect between risk and reward became evident by the proliferation of mortgage brokers in the residential lending process. Wholesale lending boomed over this period, becoming two thirds of the source of loan business for residential mortgage origination. Mortgage brokers were able to select the appraisers for the mortgages that they sent to banks.

Despite the fact that there are reputable mortgage brokers, this relationship is a fundamental flaw in the lending process since the mortgage broker is only paid when and if the loan closes. The same lack of separation existed and still exists between rating agencies and investment banks that aggressively sought out AAA ratings for their mortgage securitization products. Rating agencies acceded to their client’s wishes in the name of generating more revenue.

As evidence of the systemic defect, appraisers who were magically able to appraise a property high enough to make the deal work despite the market value of that locale, thrived in this environment. Lenders were in “don’t ask, don’t tell” mode and they could package and sell off those mortgages to investors who didn’t seem to care about the value of the mortgage collateral either. Banks closed their appraisal review departments nationwide which had served to buffer appraisers from the bank sales functions because appraisal departments were viewed as cost centers.

The residential appraisal profession evolved into an army of “form-fillers” and “deal-enablers” as the insular protection of appraisal professionals was removed. Appraisers were subjected to enormous direct and indirect pressure from bank loan officers and mortgage brokers for results. “No play, no pay” became the silent engine driving large volumes of business to the newly empowered valuation force. The modern residential appraiser became known as the “ten-percenter” because many appraisals reported values of ten percent more than the sales price or borrower’s estimated value. They did this to give the lender more flexibility and were rewarded with more business.

HVCC now prevents mortgage brokers from ordering appraisals for mortgages where the lender plans on selling them to Fannie Mae or Freddie Mac which is a decidedly positive move towards protecting the neutrality of the appraiser. Most benefits of removing the mortgage broker from the appraisal process are lost because HVCC has enabled an unregulated institution known as appraisal management companies to push large volumes of appraisals on those who bid the lowest and turn around the reports the quickest. Stories about of out of market appraisers doing 10-12 assignments in 24 hours are increasingly common. How much market analysis is physical possible with that sort of volume?

After severing relationships with local appraisers by closing in-house appraisal departments and becoming dependent on mortgage brokers for the appraisal, banks have turned to AMC’s for the majority of their appraisal order volume for mortgage lending.

Appraisal management companies are the middlemen in the process, collecting the same or higher fee for an appraisal assignment and finding appraisers who will work for wages as low as half the prevailing market rate who need to complete assignments in one-fifth the typical turnaround time. You can see how this leads to the reduction in reliability.

The appraisal profession therefore remains an important component in the systemic breakdown of the mortgage lending process and is part of the reason why we are seeing 300,000 foreclosures per month.

The National Association of Realtors and The National Association of Home Builders were among the first organizations to notice the growing problem of “low appraisals”. The dramatic deterioration in appraisal quality swung the valuation bias from high to low. The low valuation bias does not refer to declining housing market conditions. Despite mortgage lending being an important part of their business, many banks aren’t thrilled to provide mortgages in declining housing markets with rising unemployment and looming losses in commercial real estate, auto loans, credit cards and others. Low valuations have essentially been encouraged by rewarding those very appraisers with more assignments. Think of the low bias in valuation as informal risk management. The caliber and condition of the appraisal environment had deteriorated so rapidly to the point where it may now be slowing the recovery of the housing market.

One of the criticisms of appraisers today is that they are using comparable sales commonly referred to as “comps” that include foreclosure sales. Are these sales an arm’s length transaction between a fully informed buyer and seller is problematic at best. While this is a valid concern, the problem often pertains to the actual or perceived condition of the foreclosure sales and their respective marketing times.

Often foreclosure properties are inferior in condition to non-foreclosure properties because of the financial distress of the prior owner. The property was likely in disrepair leading up to foreclosure and may contain hidden defects. Banks are managing the properties that they hold but only as a minimum by keeping them from deteriorating in condition.

In many cases, foreclosure sales are marketed more quickly than competing sales. The lender is not interested in being a landlord and wants to recoup the mortgage amount as soon as possible. Often referred to as quicksale value, foreclosure listings can be priced to sell faster than normal marketing times, typically in 60 to 90 days.

The idea that foreclosure sales are priced lower than non-foreclosure properties is usually confused with the disparity in condition and marketing times and those reasons therefore are thought to invalidate them for use as comps by appraisers.

Foreclosure sales can be used as comps but the issue is really more about how those comps are adjusted for their differing amenities.

If two listings in the same neighborhood are essentially identical in physical characteristics like square footage, style, number of bedrooms, and one is a foreclosure property, then the foreclosure listing price will often set the market for that type of property. In many cases, the lower price that foreclosure sales establish are a function of difference in condition or the fact that the bank wishes to sell faster than market conditions will normally allow.

A foreclosure listing competes with non-foreclosure sales and can impact the values of surrounding homes. This becomes a powerful factor in influencing housing trends. If large portion of a neighborhood is comprised of recent closed foreclosure sales and active foreclosure listings, then guess what? That’s the market.

Throw in a form-filler mentality enabled by HVCC and differences such as condition, marketing time, market concentration and trends are often not considered in the appraisal, resulting in inaccurate valuations. As a market phenomenon, the lower caliber of appraisers has unfairly restricted the flow of sales activity, impeding the housing recovery nationwide.

In response to the HVCC backlash, the House Financial Services Committee added an amendment to the Consumer Financial Protection Agency Act HR 3126 on October 21st which among other things, wants all federal agencies to start accepting appraisals ordered through mortgage brokers in order to save the consumer money.

If this amendment is adopted by the US House of Representatives and US Senate and becomes law, its deja vu all over again. The Appraisal Institute, in their rightful obsession with getting rid of HVCC, has erred in viewing such an amendment as a victory for consumers. One of the reasons HVCC was established was in response to the problems created by the relationship between appraisers and mortgage brokers. Unfortunately, by solving one problem, it created other problems and returning to the ways of old is a giant step backwards.

We are in the midst of the greatest credit crunch since the Great Depression and yet few seem to understand the importance of neutral valuation of collateral so banks can make informed lending decisions. Appraisers need to be competent enough to make informed decisions about whether foreclosures sales are properly used comps. For the time being, many are not.


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[NAR] Existing Home Sales Plunge…As Expected

January 25, 2010 | 10:11 pm | |


[click to expand]

Last month home sales spiked as first time home buyers rushed to take advantage of the tax credit before the November 30 expiration and no one was sure that the credit would be extended. As a result, the December sales reflect the sharpest decline in existing home sales in 40 years.

From the NAR press release for existing home sales:

After a rising surge from September through November, existing-home sales fell as expected in December after first-time buyers rushed to complete sales before the original November deadline for the tax credit.

fell 16.7 percent to a seasonally adjusted annual rate1 of 5.45 million units in December from 6.54 million in November, but remain 15.0 percent above the 4.74 million-unit level in December 2008.

NAR couched the bad news with a sprinkling of good news:

  • 5,156,000 existing-home sales in 2009, 4.9 percent higher than the 4,913,000 transactions recorded in 2008; the first annual sales gain since 2005.
  • National median existing-home price for all housing types was $178,300 in December, 1.5% higher than 2008

The worry here is not about the 16.7% decline – the concern is the removal of the tax credit as a stimulus for demand. I’m not advocating one way or the other – I am merely observing that housing does not yet stand on its own two feet so calling a bottom or a recovery is a mischaracterization.


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[Pending Home Sales] Tax Credit Wild Card? M-O-M Down 16%, Y-O-Y Up 15.5%

January 6, 2010 | 12:43 am | |


[click to expand]

NAR released their November 2009 Pending Home Sales Index which ended a 9 month string of increases.

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in November, fell 16.0 percent to 96.0 from an upwardly revised 114.3 in October, but is 15.5 percent higher than November 2008 when it was 83.1.

NAR attributes the drop as a pullback during November related to the uncertainty surrounding the extension of the first time home buyers tax credit which expired November 30th. However it was subsequently extended and expanded to include existing home buyers who have until the end of this April to sign a bonafide contract. We may trivialize the tax credit’s success in the NYC metro area because of the higher housing costs relative to $8,000 and $6,500 tax credits respectively but from my discussions with real estate agents around the country, it did appear to trigger a large portion of home sales in 2009.

What does the 16% drop suggest? More weakness to come?

Yes, but not in the coming months (remember this is a seasonally adjusted stat).

It signifies that the US Housing market doesn’t yet have its own set of legs. No credit = drop in sales.

The credit extension ends in April, the Fed begins their pullout from the purchasing of Fannie Mae mortgage paper, perhaps influencing mortgage rates higher.

The combination of high unemployment, rising mortgage rates and the expiring tax credit in the spring, combined with the elixir of rising foreclosures causes by sustained unemployment at high levels suggests housing sales will fall in second half 2009.

Housing in 2010: Stability in the first half, with more concern for the second half.


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[Not Really Counted] 1.7M Units In Shadow Housing Inventory

December 22, 2009 | 1:04 am | |


[click to open full report]

One of the by-products of the credit crunch has been the rise in shadow inventory. Within my own market stats, I consider shadow inventory all units that are complete or under construction but not yet offered for sale as condos (sometimes as cond-ops or co-ops). In many cases the developer was unable to sell the initial block of units offered and is therefore unable to release the units behind them.

The development stalls because the lender behind the developer usually prevents the units to be converted to rentals because the value of the project would fall considerably as a rental on their balance sheet, causing stress to their capitalization ratio.

The lender’s reluctance to make such a decision is referred to as:

  • pretend and extend
  • pray and delay
  • kick the can down the road
  • a rolling loan gathers no loss

First American CoreLogic tracks shadow inventory. They define shadow inventory as real estate owned (REO) by banks and mortgage companies, as a result of foreclosures and other actions, such as deeds in lieu, as well as real estate that is at least 90 days delinquent. They put the amount of shadow inventory at $1.7M in 3Q 09, up 54.5% from $1.1M a year ago.

Visible inventory, like the amount estimated NAR and Census every month, is estimated at $3.8M, down 19.1% from $4.7M last year.

The total unsold inventory (which combines the visible and pending supply) was 5.5 million units in September 2009, down from 5.7 million a year ago. The total months’ supply was 11.1 months, down from 12.7 a year earlier. This indicates that while the visible months’ supply has decreased and is beginning to approach more normal levels, adding in the pending supply reveals there is still quite a bit of inventory that will impact the housing market for the next few years, especially in the context of the current increase in home sales, which is in part due to artificially low interest rates and the homebuyer tax credit.

In other words, even with the surge in activity over the past several months, total inventory hasn’t changed all that much (I agree with Bob).

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[Tax Credit] Existing Home Sales Up 10.1% M-O-M, 23.5% Y-O-Y

November 23, 2009 | 4:01 pm | |

The National Association of Realtors released their October 2009 Existing Home Sale Report and the news was positive and kind of weird.

Driven by the first-time buyer tax credit, existing-home sales showed another big gain in October with a strong uptrend established over the past seven months, while inventories continue to decline.

It looks like the uptick in sales last month has been eliminated with the downward revision this month.

Existing-home sales

Existing-home sales – including single-family, townhomes, condominiums and co-ops – surged 10.1 percent to a seasonally adjusted annual rate1 of 6.10 million units in October from a downwardly revised pace of 5.54 million in September, and are 23.5 percent above the 4.94 million-unit level in October 2008. Sales activity is at the highest pace since February 2007 when it hit 6.55 million.

The number of sales was up 23.5% over the same period last year and up 10.1% from August. Both saw unusually sharp increases, caused by the expiration of the tax credit (and then renewal and expansion), falling mortgage rates, rising foreclosures (falling prices) and improved affordability.

If you remove the seasonality adjustment, the number of sales was up 20.8% over the same period last year and up 6.6% from August, still significant.

“It’s an impressive increase and shows a lot of pent-up demand for housing,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. “Buyers have enough confidence to take the plunge. The housing market recovery will be a durable one.

I’m not clear how the recovery is durable since it is solely dependent on artificially depressed mortgage rates, federal agency bailouts and tax credits.

Median existing home price

Prices continued to fall as there remained a large market share of foreclosures and lower priced properties and condos receive the most interest from buyers.

The national median existing-home price for all housing types was $173,100 in October, down 7.1 percent from October 2008. Distressed properties, which accounted for 30 percent of sales in October, continue to downwardly distort the median price because they usually sell at a discount relative to traditional homes in the same area.

Listing inventory continues to decline.

Total housing inventory at the end of October fell 3.7 percent to 3.57 million existing homes available for sale, which represents a 7.0-month supply2 at the current sales pace, down from an 8.0-month supply in September. Unsold inventory totals are 14.9 percent below a year ago.

Whats kind of weird about all of this good news, is that prices are falling,low end sales activity surged, market share of foreclosure sales remains high and high end housing market segments are the weak.

The NAR press release seems to couch readers in their anticipated sharp decline in sales over the winter.


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[The Housing Helix Podcast] John Heithaus, Senior Vice President, SentriLock

November 3, 2009 | 11:46 pm | Podcasts |


I get to catch up with a long time colleague and real estate veteran John Heithaus, Senior Vice President of Sales, Marketing and REALTOR® Alliances at SentriLock.

He has twenty-nine years of experience in corporate relocation management and residential real estate. His career includes executive positions with Merrill Lynch Realty, Coldwell Banker Residential Brokerage and Relocation, Monster.com and Prudential Real Estate & Relocation.

John’s entrepreneurial ventures include co-founding very successful startups and emerging businesses: Virtual Relocation.com (acquired by Monster.com); Certified Closing Network (acquired by First American Corporation), TAOW Productions, and Superstar Factory Productions.

John is one of the most forward thinking, creative and energetic people in real estate, and he plays a pretty mean guitar.

Check out the podcast

The Housing Helix Podcast Interview List

You can subscribe on iTunes or simply listen to the podcast on my other blog The Housing Helix.


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[Interview] John Heithaus, Senior Vice President, SentriLock

November 3, 2009 | 10:04 pm | Podcasts |

Read More

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[Seasonalized?, Annualized?] Pending Home Sales Index Up 8th Consecutive Month

November 2, 2009 | 7:00 pm | |

The National Association of Realtors released its pending home sale index results from September and the results were good as expected:

The Pending Home Sales Index, a forward-looking* indicator based on contracts signed in September, rose 6.1 percent to 110.1 from a reading of 103.8 in August, and is 21.2 percent higher than September 2008 when it stood at 90.9. The gain from a year ago is the largest annual increase on record, and the index is at the highest level since December 2006 when it was 112.8.

*Note: only forward looking in the context of closed sales.

Yun describes the actual contract activity as less than August but if adjusted for seasonality and annualize, its way up. Extrapolating like this makes me uncomfortable – yes its better news, but not with a solid foundation. Especially the inference that this is a continuing trend.

The uptick in activity was explained as a last minute rush to take advantage of the first time buyer’s tax credit. While its beginning to look like the tax credit will be renewed with income limits expanded, I suspect sales would fall sharply if it wasn’t. Stimulus is designed to prime the pump but it doesn’t feel like prime yet, especially over the next month or two when Case Shiller goes negative.


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[HVCC Watch] Amendment to CFPA of 2009 Snuck In – Return To Old Days?

October 27, 2009 | 4:10 pm |

Oops! Wrong HVCC (not Huron Valley Corvette Club).

We’re talking Home Valuation Code of Conduct and its quickly running its own course (sorry).

Last week, an amendment was added to the Consumer Financial Protection Act of 2009 that would effectively “Sunset” the Home Valuation Code of Conduct or “HVCC” (pronounced “Havoc”).

From Valuation Review magazine:

An amendment was added late Wednesday Oct. 21 to the Consumer Financial Protection Act of 2009 that would sunset the HVCC, allow appraisals to be ordered by mortgage brokers again and would make a new Negotiated Rulemaking Committee responsible for creating one set of appraisal independence requirements across all the federal agencies.

This amendment was championed by the National Association of Mortgage Brokers (NAMB) who were dead set against HVCC for very different reasons than the best appraisers in the industry are. Regardless, HVCC is a systemic accident waiting to happen.

Setting aside the weak production quality, this video is a great source of clarification about the misunderstands surrounding HVCC.

Mortgage brokers were targeted by HVCC as providing undue pressure on appraisers for overvaluation. Systemically, thats absolutely true – of course there are always exceptions. But you can’t rely on the honor system for a financial system structure – thats what where we just came from.

Mortgage brokers get paid when the transaction closes. Guess what kind of appraiser thrived in this kind of environment? Form-fillers.

However, removing mortgage brokers from the process enabled AMC’s which are even more problematic, providing low biased appraisals. Simplistic assessments of the removal of HVCC as a good thing for appraisers is short sighted.

How about the public getting a lending system that has a neutral appraisal environment so the parties getting paid don’t game the system? That means that appraisers shouldn’t be getting assignments from individuals whose commission depends on the outcome. If HVCC is removed and we revert to the prior way of doing business, its a missed opportunity to give consumers fair valuations.

To demonstrate how detached from reality Freddie Mac is, they seem to think HVCC has improved appraisal quality?

This is an opportunity to break free of the past and break free of HVCC and replace it with a better way.


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[NAR] Existing Home Sales Surge 9.4%, 45% Are First Time Buyers

October 23, 2009 | 11:08 pm | |


[click to expand]

Not surprisingly, existing home sales jumped this month. Here’s NAR’s existing home sales release and the data.

including single-family, townhomes, condominiums and co-ops – jumped 9.4 percent to a seasonally adjusted annual rate1 of 5.57 million units in September from a level of 5.10 million in August, and are 9.2 percent higher than the 5.10 million-unit pace in September 2008. Sales activity is at the highest level in over two years, since it hit 5.73 million in July 2007.

The NAR wants the tax credit to be renewed so that the housing market can experience a self-sustaining recovery.

In fact, its all about the tax credit.

Sales of existing homes surged in September as buyers raced to take advantage of the tax credit for first-time home buyers before it expires next month.

Nationwide, sales of previously owned homes jumped 9.4% in September to a seasonally adjusted annual rate of 5.6 million from a downwardly revised 5.1 million in August, the National Assn. of Realtors reported Friday.

A long time friend of mine in suburban Chicagoland, who is a successful real estate agent told me that three quarters of his business was prompted by the tax credit. If its not renewed, sales will fall sharply.

In other words, the take away from this report seems to be a bit of a false positive. The surge in sales was a release of pent-up demand from a stalled market in the beginning of the year. Everyone’s chiming in about how important the tax credit is to restore housing market activity.


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