Matrix Blog

Now that the Oscars are behind us and the “next big snowstorm” just missed NYC, I thought I would finally talk about pizza. But because of why you are here – I’ll make price per inch and price per square foot interchangeable.

One of my favorite podcasts, NPR Planet Money had a great segment called “74,476 Reasons You Should Always Get The Bigger Pizza“

The math of why bigger pizzas are such a good deal is simple: A pizza is a circle, and the area of a circle increases with the square of the radius. So, for example, a 16-inch pizza is actually four times as big as an 8-inch pizza. And when you look at thousands of pizza prices from around the U.S., you see that you almost always get a much, much better deal when you buy a bigger pizza.

Explanation of above math: 200.1 inches of pizza surface versus 50.2 inches of pizza surface (pi*r squared=surface area of a circle) And here’s an easy way to calculate the volume of a pizza if you can’t help get enough pizza geometry.

Here’s the (pizza) logic
The premise of the piece is that it is much cheaper to buy a large pie than a small pie on a price per inch basis. Pricing for a large pie doesn’t expand as much as the surface area does so the price per inch drops precipitously. In the example above, the 16″ pizza wouldn’t be priced 4x as much as the 8″ pizza – probably more like 2x. Apparently pizza makers don’t take geometry seriously.

Buy the large and throw the unused portion in the fridge. Perhaps that is why people buy homes somewhat larger than what they actually need – they will grow into it.

Suburbs
In suburban real estate, after a certain point, larger the home is, generally the lower the price per square foot. There is a point of diminishing return on excess square footage. The total dollar price is higher, obviously, but the cost of additional space is usually less on a per square foot basis. Hence the pizza analogy applies.

Queen of Versailles, Florida
A well known example of diminishing return is the home featured in the documentary, Queen of Versailles. The 90,000 square foot home is so oversized for the Windmere, South Florida housing market that the vast majority of the living area likely has no value as a single family – other than to the current owners, of course.

Manhattan
In a market with one of the highest per capita population density for a US city, there is a premium for larger contiguous space so perhaps that is why we have so many pizza joints. Here is an price per square foot table by apartment size – you can see how ppsf expands with apartment size consistently over the decade (actually it has shown this pattern for the past 25 years). It’s expensive to get more living area in Manhattan.

Tags: NPR, Pizza, Planet Money

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The New York Times Real Estate goes gonzo this weekend with a nice write-up AND a large color artwork on perhaps the least understood part of the home buying process.

No not the radon test…

The appraisal. Can’t live with them, can’t live without them.

Here’s my stream of consciousness on the topics brought up in the article:

• “Sale and “Comparable” are not interchangeable terms. Really.
• There is no ratings category for (like totally) “super excellent.” The checkboxes provide good average fair poor with “good” at top end (but fear not, “super excellent” is marked “good” and like total adjusted for).
• Not all amenity nuances that are important to you as a seller (ie chrome plated doorknobs), are important to the buyer.
• Not all amenity nuances that are important to you as a seller, are measurable in the market given the limited precision that may exist.
• Not all appraisers have actually been anywhere near your market before they were asked to appraise your home, so technically they shouldn’t be called appraisers. Since their clients don’t seem too concerned about this, something like “form-filler” seems more appropriate.
• Most appraisers who work for appraisal management companies are not very good, but some actually are.
• When an appraiser makes a time-adjustment for a rising market, understanding whether a bank will accept that adjustment or not is (should be) completely irrelevant and quite ridiculous (unless they are “form-fillers” and not actual appraisers). I have always believed that the appraiser’s role is to provide an opinion of the value and that occurs in either flat, rising or falling markets.
• HVCC was a created with best intentions by former NY AG Cuomo by attempting to protect the appraiser from lender pressure, but it has literally destroyed the credibility of the appraisal profession by enabling the AMC Industry.
• The 12% deal kill average of an AMC an arm’s length sale properly exposed to the market is absolutely an unacceptably high amount and a major red flag for appraiser cluelessness about local markets.
• I’ve never heard of a major bank since the credit crunch began who would throw out the original appraisal found to have glaring errors that would severely impact the result. My quote on this nailed that sentiment with brutal precision, if I do say so:

“You have a better chance of winning Powerball than getting a lender to abandon the first appraisal.”

Understanding the Home Appraisal Process [NY Times]

Tags: New York Times, Appraisal Management Companies, HVCC, AMC, Pizza

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I recently appraised a property that was well into the 8-digit value variety – not to sound cavalier but when you are in a market like Manhattan, it’s not uncommon.

What made this assignment different was that I was contacted to appraise this property because an appraisal management company (AMC) was not comfortable using their regular panel of appraisers that do nearly all of their volume (for half the market rate and 48 hours). Although I was leery to accept the request as an exception, I had history with an exec there, they were paying our quoted fee and accepting our turn time requirements so why not?

Here’s how it went:

Day 0 – I am interviewed by the AMC representative to see whether we are experienced in this property type. The AMC rep stresses they want to be “in the loop” at all times.
Day 1 – We are engaged by the AMC to provide the report – we place a call to the property rep.
Day 2 – Property rep calls back and say they want us to inspect 3 days from now. My office informs the AMC rep the appointment via email is set for Day 5. I get a call from the AMC rep asking if a I need any help and I say “no, not at this point since we haven’t seen the property yet.” They follow with “I’ll be calling you every day of this assignment to ensure you have what you need.” I politely ask why they need to call me over the next 3 days before the inspection. The AMC rep says “yes, in case you need help.” I respond that I won’t be doing anything further until I see the property. The AMC rep said something to the effect of “Ok, I’ll wait until you inspect.”
Day 3 – The AMC representative apparently emailed me (instead of calling) but I never received it (gotta love spam).
Day 4 – The AMC representative left me a voicemail on my mobile phone and office phone chiding me because I didn’t respond to the previous day’s email (technically the AMC rep didn’t call me) and they had been forthright in saying they would contact me every day to help me and they needed to speak to me every day. I got the voicemail on my mobile during a different inspection and emailed my office asking them to let the AMC rep know I am inspecting the property the next day.
Day 5 – The AMC rep called to see how we were doing with the assignment. My assistant reminded them we were inspecting the property toward the end of the day and that they had been kept up to date. Near the end of the day I inspected the property and my office let the AMC rep know via email we had inspected the property.
Day 6 – First thing in the morning and my first chance to sit down and work on the appraisal. My office sent them an email telling them I had what I needed and confirmed the delivery date. The AMC rep called my office that afternoon to see if there was anything we needed…

This is how nearly all interaction between AMC and appraisers go. The appraiser is bombarded with meaningless status requests as the AMC industry attempts to commoditize a professional occupation. I assume the AMC rep in my case had a checklist – akin to those dated checklists with initials you see on the back of doors in highway rest stop bathrooms assuring you the bathroom was cleaned each day of the week.

The result has been the crushing of appraisal quality because trained, experienced professionals are opting out of this madness because time = money. Cut the fees 50% and then waste another 30% of an appraiser’s time with this meaningless activity and you don’t end up with a more reliable valuation opinion.

In all sincerity, I take my hat off to those professional appraisers who need to work with AMCs out of necessity that are able to put up with being treated like a teenager on their first job.

It reminds me of the canned customer service interaction we are all forced to do when we interact with a company on the phone. The call ALWAYS ends with the canned “Is there anything else I can help you with?” Yet the relationship was already established and fine up until that point and the authentic nature of the conversation is suddenly over. I pause for a second and say “Yeah, I could go for a large pizza right now.”

Tags: Appraisal Management Companies, AMC, Pizza

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Today is a big day at our commercial appraisal firm, Miller Cicero. My partner John Cicero has shared a few thoughts on the anniversary – after all, he is the smartest guy I know.

Here’s John Cicero’s take on it.

Seven years ago today Miller Cicero was formed, a collaboration between me and Jonathan Miller (before he became famous and went on Mexican TV), his wife Cheryl (who watches over the purse strings) and his sister Dina (the true brains of Miller Samuel!) It’s been a great ride and I couldn’t ask for better partners.

Similarly, I couldn’t ask for a better group of staff appraisers, especially Michael Falsetta, Executive Vice President, who freakishly remembers every sale that ever took place in Brooklyn since the turn of the century (and knows where to get the best pizza and grilled octopus in every borough), and Steve Manheimer, Senior Vice President, who leaves no stone unturned when researching a project and makes more demands on himself than I ever do. I know that I’m biased but I believe that I have the best group in the business.

Its been an interesting time to be appraising property in the New York metro area, though. Over the past seven years we’ve seen property double and triple in value, buyers camping outside the sales offices of new condos to be the first to buy, 21-year olds fresh out of school becoming developers (cute!) and then…just as quickly, complete market paralysis.

OK, enough nostalgia. I need to get back to trying to figure out what anything is worth these days….

Tags: Pizza, Miller Cicero

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One of the most glaring housing issues that hasn’t been resolved is loan modifications. There are multiple owners of the mortgage, the servicers aren’t incentivized to move forward.

There was an interesting article in the New York Times which described how the lack of traction in loan modifications may not be simply the lack of infrastructure to handle the volume but rather the incentive to loan servicer, those who make more money in fees by taking longer to move forward than to resolve rather than move on to the next case.

Less than 10% of modified mortgages result in a forgiveness of debt. Late fees and other associated payments are tacked on to the end of the mortgage term, resulting on higher payments or a much larger mortgage balance. In many cases loan modifications can result in higher payments – no wonder the default rate is high. How about modifying some stupidity?

Holden Lewis of Bankrate.com and I spoke about this yesterday in the podcast now available on The Housing Helix – he disagrees with the New York Times article premise that delay is profitable.

James Surowiecki’s “No Home Yet” article in The New Yorker lays out the modification landscape quite succinctly:

• servicers can make more money on fees by “dragging their feet”
• mortgagae delinquencies continue to rise
• servicers can’t renegotiate in bulk
• borrowers aren’t informed

But the biggest problem may be that the programs are based on a faulty assumption: that modifying mortgages makes everyone—borrowers and lenders alike—better off. The idea is that since renegotiating a mortgage saves banks the hassle of foreclosing on a house, watching it sit empty, selling it at a bargain-basement price, and so on, renegotiation makes economic sense for lenders. Give lenders a nudge to start acting sensibly, and you can stop foreclosures at a relatively small cost.

Speaking of scrambling.

Tags: Bankrate.com, Pizza

4 Comments

Jonathan Miller, President & CEO, Miller Samuel
Dottie Herman, President & CEO, Prudential Douglas Elliman

To hear the clip.

I have been writing a series of markets reports covering the New York region for about 14 years via Prudential Douglas Elliman. It’s been a lot of fun to do them, especially in a market that lives, breathes, eats and sleeps real estate. The popularity of our neutral report series continues to motivate us to expand the geography and types of property it covers. Can we say Brooklyn, finally?

Last week we released the 2Q 08 Manhattan Market Overview. One of the recent efforts to bring the results and interpretation of the market to the consumer and the real estate industry is by a video conversation on the market, which Dottie and I began last quarter.

Call me crazy, but I always find it refreshing to hear candor rather than processed press release speak.

Catch the subliminal green blip near the end of the clip? Are you suddenly hungry for pizza?

Tags: Dottie Herman, Television, Pizza

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Ok, so we aren’t feeling so good about things lately. To top it off, today is Tax Day. And why is it on April 15th? (hint: float)

Some people, arguably, are way too happy about today.

The real reason April 15th is such a great day:

’cause you get free:

• donuts
• pizza
• beer …and of course,
• photocopies.

Tags: Pizza

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Periodically, I like to round-up some of my favorite recent blog posts that are housing market/credit/economy related. There’s a lot of passion and great commentary out there, you just have to light a fire to find it (sorry). Of course, I throw in random stuff as well.

• The 2008 HousingPANIC Award Nominees (first draft) [Housing Panic]

• How Fannie And Freddie Are Making Remortgages Cost-Prohibitive [The Mortgage Reports]

• Our Ass-Backwards Banking System [Big Picture]

• The Sorry Mess That Is Alphonso Jackson’s HUD [Calculated Risk]

• Central bank independence [Econbrowser]

• Where did all the get-rich real estate books go? [BW/HotProperty]

• Tradition Sees UK Housing Prices In 8 Year Slump [Housing Derivatives]

• Fed Is Incompetent And Dangerous [Mish]

• Pizza-Flation [The Stalwart]

• FHA: Here Today….[Lenderama]

Tags: FHA, Pizza

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Hey I admit it, I bought the former Fed Chair Greenspan’s new book The Age of Turbulence on Monday, the first day it was available. Of course I bought as a birthday present for me, not to be opened for a few weeks when my maturity age of 17 clashes in screaming technicolor with my actual age, even louder than a rate cut. We have strict rules around my house. If I buy something under the pretense of it being a birthday present, its not to be opened until then.

Well its been a week and I have had some time to reflect on the events associated with the new book, before I have even read it.

What thought first comes to mind? Incredible timing. Who says you can’t time a market?

Announce a book the day before one of the most anticipated FOMC meetings in recent memory, support your successor, admit some flaws but no regrets, criticize the administration as well as both the Democrats and Republicans in Congress, acknowledge a housing market problem but keep your reputation in tact. Hey, the $8M advance needs to be earned.

All this gets you a number one ranking on Amazon.com, ahead of Water for Elephants, Playing for Pizza and Math Doesn’t Suck: How to Survive Middle-School Math Without Losing Your Mind or Breaking a Nail.

Since I admired Greenspan during his tenure, I can’t tell if the insight being provided during the media blitz is helpful in understanding how we got here, or merely spin.

Caroline Baum, one of my favorite columnists on Bloomberg sums it up nicely:

Greenspan, who reportedly received an advance of more than $8 million for this memoir, seems eager to stave off criticism for keeping short-term rates too low for too long in 2003 and 2004, stoking a housing bubble in the process. He was aware of reduced credit standards on subprime mortgage loans, he says, “but I believed then, as now, that the benefits of broadened home ownership are worth the risk.'”

That view is being challenged as the housing bubble deflates, delinquencies and foreclosures rise and financial losses mount. The reader is left wondering if a more introspective Greenspan, and one less interested in shaping his legacy, wouldn’t have found a regret or two along the way.

With a possible recession looming and housing on the downslide (a word?), I am experiencing my own personal turbulence and have officially added it to my economic vocabulary in addition to “contained”, “frothy” and “irrational exuberance”.

Tags: Alan Greenspan, Sub-Prime, Pizza

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About a month ago, we noticed a lot of equipment appearing in the yard of the house a little ways down the road and across the street. It backs up to our street and fronts an adjacent neighborhood comprised of mainly 1950’s style colonials around a cul-de-sac.

The neighborhood is becoming the backdrop for the filming of a movie this summer based on the 1961 Richard Yates book called Revolutionary Road starring Leonardo DiCaprio and Kate Winslet, two of my favorites.

What does this have to do with real estate? Hmmmm… ok, give me a second and I’ll think of something.

A month ago, we were approached by the Revolutionary Road movie production crew to film scenes in our house for 3-4 days. They would move all of our furniture and possessions out of the house and put us up in a hotel. Of course, for the hassle, the going rate was $10,000 per day. Hey, I could suffer with the inconvenience. It would cover the late fees for the dvds my kids lost from Blockbuster last year.

Over the course of the week, we were in the running with two other houses. Ultimately, the powers that be decided to go with a house in an adjacent town because our interior condition was “too nice” and “not worn enough.” Of course I was tempted to confirm whether they had actually looked in my teenage sons’ bedrooms before they rendered the decision.

After our brush with the movie business went bust, we found out that several neighbors, closer to the main house where the movie was to be filmed, had been hired for the use of their driveways to store equipment, set up food tables for staff, store the port-a-potty truck, etc. The going rate was about $250 per day which seemed pretty cheap to me, but probably worth the bragging rights.

Our next door neighbor’s house, which has been for sale, was rented out for the actors and actresses to have a nice place to practice their lines. I don’t know what the rate was, but the owners of the house where a large portion of the filming is being done, were supposedly paid $185,000 for three months of use and were rented a large house on the waterfront.

In New York City, where there are a heck of a lot movies being filmed on any given day, there are people who actively market their properties to be used in movies. Its a whole cottage industry. In a number of the properties we have inspected for appraisals over the years, many homeowners will volunteer their experiences. Its not clear whether this type of short term property use impacts market value locally, but everyone seems to have fun talking about it.

Lately, the street in front of my house is often clogged with parked semi-tractor trailer movie production trucks and police directing traffic. Its certainly exciting but I can see it is going to get old fairly quickly.

But if Leonardo and Kate were to come over for dinner…we’ll splurge and order out pizza.

Tags: Pizza

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The idea of flipping your property for a quick profit was an exciting and lucrative-sounding idea to many during the real estate boom. In fact it was one of the driving forces of the real estate economy for the past 5 years, until recently. Services like [CondoFlip](http://www.condoflip.com) reflected opportunity in the inefficiency of a fast moving real estate market and the urgency for many to get in to it to get rich quick. However, it seems to me that whenever some investment gimmick is mainstreamed, many get hurt. But hey, all those book writers and seminar givers made a bundle.

Now the term “flip” is more like the day-old pizza you left out all night after watching a World Series games with friends the night before, rather than the warm sizzling version that was delivered.

Here’s a story about a 24-year old real estate investor that was covered by [USAToday](http://www.usatoday.com/money/economy/housing/2006-10-22-young-flipper-usat_x.htm) and the [San Francisco Chronicle](http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2006/10/06/carollloyd.DTL). He is described as the poster child for all that can go wrong. [Find out who that guy’s public relations rep is, he got some great coverage.]

He now has $140,000 in credit card debt and 5 of his 8 homes in foreclosure. From his candor in the interviews, it also looks like he may have defrauded lenders he dealt with in order to get financing. The thing is, that he like others, saw this a business decision, not unlike the way some lenders pressured appraisers to make the number (sorry, here I go again).

He also runs a blog (with advertising) called [IamFacing Foreclosure.com](http://iamfacingforeclosure.com/) with the subtitle “Learning to Sell my Houses Fast, Avoid Foreclosure, Get Out of Debt, and what NOT to do in Real Estate.” and gets a large amount of commenting, much of it not very sympathetic.

Flipping real estate in many markets took on the characteristics of a ponzi scheme. At some point, there is someone left holding the bag.

The National Association of Realtors says that in 2005, 28% of all properties were purchased by investors and I suspect a large number of those were property flippers. I’ll bet the total number of investor purchasers drops substantially by the end of 2006.

Why do so many investors insist on going too far? Is there something in our culture that wants an easy buck, despite the warning signs? Sure many profited but I’ll bet that many kept going after it was too late. Think of all the listings in local markets known for flipping right now. I’ll bet many of those investors had made a profit on prior deals and went one or two deals too far and now regret it. Easy access to cash through creative financing techniques like liar loans, option-arms and others made the decision for them.

My grandfather went to the race track weekly for years and only allowed himself to bring a twenty dollar bill to bet so he would never get into trouble. Of course, he never made it big. “You gotta think big to make it big.”

Yeah, right.

Tags: Pizza, NAR, National Association of Realtors

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Well, maybe thats a little harsh. Is it just me or is [economic data released each month](http://www.truthpizza.org/logic/stats.htm) alternating between panic and calm? A lot of information is being thrown at us and its got me worried.

Over the past several months, the economy has seemingly see-sawed between improvement and decline. A lot of it has to do with [revising previously released stats by the Department of Labor.](http://www.dol.gov/dolfaq/go-dol-faq.asp?faqid=98&faqsub=Consumer+Price+Indexes&faqtop=Statistics&topicid=6)

The [factors that are used to seasonally adjust the data](http://www.bls.gov/cpi/cpisaqanda.htm) are updated annually. Also, seasonally adjusted data that have been published earlier are subject to revision for up to 5 years after their original release.

The first thing I want to (really) understand is seasonal adjustments. I am very wary of their use because the methodologies used by the [Bureau of Labor Standards seem complicated and not fully explained.](http://www.bls.gov/cpi/cpisaqanda.htm) There does not seem to be a standard technique or a way of verifiying their validity.

Now we have concerns over the auto maker data which is important since it is a significant component of core inflation. Prices of cars in June rose 1.5% after a 1% fall in May [despite aggressive discounting by automakers [Note: Paid Subscription]](http://online.wsj.com/article/0,,SB112428088507015510,00.html?mod=djemTAR).

As quoted in the Wall Street Journal…

But the advance in auto prices appears to be inconsistent with the aggressive discounting by auto makers over the past few months.

Another stat bash involves [petroleum data [Note: Subscription]](http://www.marketwatch.com/news/story.asp?siteid=mktw&dist=nwtwk&guid=%7BD24A6E8A%2D30C7%2D4592%2DB54B%2D07372BA4EA73%7D) which is one of the major factors of CPI.

As quoted in the MarketWatch…

The oil market has always been volatile, but there’s one constant that reliably drives prices one way or another: the weekly reports on U.S. petroleum supplies.

With many home-buying consumers on economic pins and needles and a blind faith in government statistics, there should be concern that we are all getting more accurate information.

Go to sequel to this post [Lies, Damn Lies, And Government Statistics: Part II](http://matrix.millersamuel.com/?p=68)

Tags: Pizza

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