Ziggy Stardust And The Spiders From The Housing Market

April 1, 2022

Yes, obviously.

And we’ll have the receipts…

And here’s what it will sound like…

But I digress…

Listing Inventory Collapse = Mortgages Rates Rising + Housing Prices Rising

There was a spectacular piece in the New York Time’s Upshot section that describes the current housing market: Can Home Prices and Interest Rates Soar at the Same Time? Rising mortgage rates are supposed to cool house prices. But this time could be different.

Here are some of the charts from the piece:

Marketplace: Housing Inventory’s Collapse

I was a guest on Marketplace the other day when the Case Shiller report came out with a 19.2% YOY increase.

Without going into all my issues with Case Shiller, here is something I keep saying that really conveys the supply problem in resale housing:

“If you pick a typical town or neighborhood, and let’s call the normal level of inventories 200 [homes for sale] and then last year, it fell to 50. And so everybody’s saying, ‘Wow, inventories really dropped.’ Now it’s eight, where there’s an utter collapse,”

I knew when the piece ran because I got a bunch of texts from friends who heard it. Apparently, my peer group all listen to Marketplace. Here’s the story.

Fox5 New York Did A Long Island Piece On Our Newsday Bidding War Market Study

Last weekend, Newsday did a front page spread (our 6th time on the cover) on our bidding war analysis:

Fox5 TV picked up the story, including an interview with moi.

Matrix Blog: Combining Manhattan Apartments Usually Results In A Higher PPSF Before Renovations

Here is a Matrix post I wrote eight years ago that still holds: Combinations: Creating a Larger Manhattan Co-op or Condo [Matrix Blog]. I got a couple of inquiries on combos this week so I thought I’d share since combos are in the zeitgeist at the moment.

1q14MATRIXcombos
[click to expand]

Over my career, I have observed a higher frequency of combination apartments (ie co-ops or condos) when inventory is tight.  A combination apartment is simply the connecting of 2 or more adjacent apartments (to either side, above or below).  It may be easier and/or less expensive to buy the apartment next door to create a larger space (even if you have to overpay for it) than to brave the tough market searching for a larger place to live.

A few years ago I started to track this during the preparation of the Elliman Report: Manhattan Sales. I looked at the actual apartment numbers and counted those that suggested they were combined. I am clearly omitting apartment nomenclature that is not so clear ie 7AB is renamed 7A, so my results are conservative.  The above chart reflects the recent trend of more combinations being sold but doesn’t necessarily equate to more being created, so new combinations would only be considered a subset of this data.

I’ve dubbed the phenomenon “1 + 1 = 2.5” because there is a premium for larger contiguous space.

I’ve always thought of co-op or condo buildings that allow combinations (nearly all do) as providing a potential way for shareholders to realize value upside, thereby enhancing the price structure of a building ie higher values rub off on other apartments in the same building.

Some top line ideas about combinations

– No shares are lost and in fact, many combinations result in the acquisition of dormant common hallway space providing additional revenue in perpetuity to the corporation and a cash infusion from the purchase price.
– Larger units sell for more on a ppsf basis (ie my formula above) potentially influencing higher values for other units.
– Fewer apartments in the mix is a non-issue (ie risk) in a building this size, unlike, say a 4 unit brownstone.
– I’ve always thought it wise to keep the stock certificates separate to give the buyers and co-op more flexibility, but I see this done both ways (and admittedly don’t understand any legal nuances on this point.)

Some other more granular thoughts

Some layouts don’t work
– Not all combo layouts make sense or provide value upside.
– Layouts tend to work better in pre-war and new developments than in post-wars.
– 1980s condos often have the least combinable layouts – i.e., a side-by-side 1-bedroom.
– Over the last decade, developers have kept this in mind during construction to give them more flexibility during the sales process.

Higher value per square foot
– Creating larger apartments creates value upside to existing space ie “1+1=2.5”
– Sometimes large combos can be oversized for the building and there is no ppsf premium for the larger space.
– When an owner of a large unit buys the adjacent unit, the mere fact that the same unit owner owns both usually results in a ppsf premium before renovations are made to connect.
– The upside in value for a smaller apartment, means that a buyer can overpay for the unit as an individual sale but the addition of the smaller unit to the large unit adds value to both units on a ppsf.
– The highest value is realized when the buyer can’t tell the layout was comprised of two different units.  Simply creating a door between two apartments would realize the least upside.

That second kitchen
– The biggest “tell” on a combo is the existence of a second kitchen.
– They are often converted to a laundry room or bathroom, taking advantage of the utility connections.
– Buildings might object to the removal of the second kitchen because it may impact the building Certificate of Occupancy – I defer to lawyers on this point.

What do lenders think?
– Some banks are scared of combinations and others are not.
– In my experience banks require financing on the whole apartment – if they have a loan using the collateral of one of the apartments, they will require that it be replaced with a new mortgage to cover both apartments.
– Banks often get confused on the value of a combo asking the appraiser to provide a value for each of the separate apartments before they are combined. The problem with that position is that the combination is usually worth more as one apartment (even before considering improvements) – in other words, the sum of the parts is less than the whole and the bank will incorrectly assume the collateral is inadequate.

Maintenance fees
– Many agents tell me it is assumed that maintenance charges are skewed higher for combos. I can’t prove this, all other things being equal.  When it occurs, it’s probably for reasons other than simply combining the units.
– A combo in a small building, ie a 4-unit brownstone co-op, raises the risk to the remaining shareholders if the combo shareholder stops paying their maintenance charges. Risk exposure to a mid to large-sized building should be nominal.

Common Area
– Quite often hallways are purchased and incorporated into a combo layout for a better result.
– The co-op wins by getting a cash infusion for the purchase and income in perpetuity for the additional share allocation from the common area purchase.

Why Manhattan Churches Are Important To Developers

Natalie Sachmechi, a real estate reporter for Crain’s New York explains:

When The Elevator Rarely Works And Apartments Are Scarce, Do You Keep Climbing?

Wow, this story on the 750 apartments at 20 Exchange Place was startling. Its a great read.

Since November, the skyscraper has been plagued by long elevator outages that have turned daily life upside down and trapped residents with mobility issues inside their apartments. Elevator service is unpredictable and often nonexistent, for hours at a time, above the 15th floor. The elevators that service only the lower floors have continued to work, even as the outages in the others have grown more frequent in the last two months.

Getting Graphic

My favorite charts of the week of our own making

My favorite charts of the week made by others

Len Kiefer‘s Chart Handiwork

Appraiserville

(For earlier appraisal industry commentary, visit my old clunky REIC site.)

Sign Up For A Desktop Appraisal Class And Help An Appraiser With MS!

My friend and colleague Joe Lynch asked me to pass the word about this class his organization is hosting on a very relevant topic with the proceeds going to help an appraiser who was recently diagnosed with MS.

If you don’t want to take the class but want to help, here is the link.

If you want to take the class, here’s what Joe said:

Understanding Desktop Appraisals

Help a fellow appraiser and get CE in California and Nevada

Have you been asked if you will complete desktop or hybrid appraisals? Learn the ins and outs, risks, and best practices so you can make an informed decision on whether to add these products to your offerings. The Real Estate Appraisers Association (REAA) is hosting a Zoom class from Denis DeSaix, MAI, SRA, principal of Metrocal Appraisals, and Jared Mickel, SRA, Director of Quality Control Escalations at Class Valuation AMC on Tuesday, April 12 from 6:30 PM PST to 8:30 PM PST. This class is approved for 2 hours of continuing education in California and Nevada.

Cost is $30 for REAA members/$60 for non-members with proceeds to go to appraiser and REAA member Alexis Grey to help her in her fight against MS.

Sign up here.
If this is your first time using the new REAA website, go here to create an account, then sign up for the class.

Questions? email reaasacramento@gmail.com

Racist MAI Appraiser Is Now Absent From AI’s “Find An Appraiser” Feature

After the horror show of that January racist email by Dave LaVigne, MAI, AI-GRS, the appraiser that authored it is no longer visible on the Appraisal Institute “Find an Appraiser” feature.

Assuming this isn’t a technical glitch, and the fact that it took 2 months to happen, I’m still glad to see this action taken if my assumptions are accurate. Hopefully, there will be transparency on what’s going with this situation fairly soon.

TAF and AI Are Back Together Again And A New Acronym Is Born

For the big picture perspective, the recent news that an original sponsoring organization, The Appraisal Institute, has rejoined as a sponsor – this is good news for the appraisal industry in a very broad sense as the industry continues to be throttled in public.

“I am pleased the Appraisal Institute is rejoining The Appraisal Foundation as a Sponsor,” said The Appraisal Foundation Board of Trustees Chair Randall Kopfer. “Our organizations share a commitment to protecting the public trust in the appraisal profession, and I look forward to our renewed partnership. The Appraisal Foundation’s work would not be possible without our Sponsors. I thank all of them for their continued guidance and support of the Foundation.”

Even better, we also get a new acronym:

FOJ + FOD = FOJAD (Friends of Jim Amorin + Dave Bunton)

For years I have plowed through TAF newsletter after TAF newsletter with Dave Bunton’s vitriol directed at Jim Amorin and the Appraisal Institute and vice versa. Up until two years ago, more than a decade had passed with both of these gentlemen attacking each other on a regular basis. We could count on it.

Apparently the pandemic brought around a rethinking of their adversarial relationship?

Nah, its really a reflection of how weak TAF has become after savaging the ASC with that bat-shit crazy letter in the summer of 2020. Once TAF became adversarial with ASC, TAF was all alone, twisting in the wind. The agreement to allow back AI as a sponsoring organization is indicative of Dave’s collapse of power. I was in that TAFAC meeting where AI was not allowed back in and by then we had grown sick of the distraction caused by their open hostility.

I’m sure AI saw TAF’s weakness as an opportunity to have more influence after TAF’s implosion of credibility and the collpase of public trust that is impacting all appraisers right now.

Don’t get me wrong though. I see this action as a plus for the industry, despite my cynicism relating to the two leaders.

Water’s House Finance Committee Hearings Revealed Massively Polarizing Views On Diversity

If you’ve got 3.5 hours to spare…

Admittedly I only listened to the first two hours of the testimony but here is what I observed:

The hearing title: Hearing: Devalued, Denied, and Disrespected: How Home Appraisal Bias and Discrimination Are Hurting Homeowners and Communities of Color got a lot of attention and member attendance seemed better than the Senate version last week.

AEI’s Tobias J. Peter kept repeating two misleading points:

– The PAVE report suggests some sort of massive government takeover of the appraisal industry which is clearly laughable. I got the impression he did not understand the regulatory structure of the industry in its current form. Yet TAF’s bureaucratic largess is exactly the opposite of AEI principles. A not-for-profit, non-federal agency, is brandishing its link to Congress, and re-writing USPAP policy every two years that gets embedded into 55 states and territorial law, all for profit, with no oversight. This is the biggest over reach I’ve ever seen!

– He also believes that the appraisal industry’s stunning lack of diversity (97% white) should not be addressed until we address all of society’s socio-economic problems which basically means that we should do nothing, forever. Once those societal problems are solved we can get to the problems facing appraisal industry which basically means “never.” If memory serves me correctly here, every single white Congressperson on the committee only addressed their questions to Tobias (and a few to Dave) and none to Lisa Rice who is a person of color. Incredible.

Dave Bunton did not come across as prepared, especially with the demographic stats of his tiny institution, and hurt his credibility under questioning from Waters, committee chair. When asked about the mix of people on TAF boards, he said that there was a person of color in 1989. Of course Dave’s monarchy began after 1989 so in effect, he was saying he prevented diversity for three decades until 2021 (and that was only after myself and others exposed the stunning lack of diversity on all his boards under his three-decade reign).

Lisa Rice‘s organization, National Fair Housing Alliance (NFHA) was one of the authors of the Appraisal Standards and Appraiser Criteria report for ASC. While I agreed with her testimony on diversity, and she was particularly adapt at analyzing the industry challenges, I do not see the cost approach as a practical way to solve the lack of diversity problem since the approach does not reflect economic forces in the same way that the income and sales approach do and would upend the bond market. The income approach would be a more effective market-based solution if that step was required (I don’t think the sales approach should be discarded).

Pledger M. (Jody) Bishop III, the current president of the Appraisal Institute, did a surprisingly good job of testimony. I wouldn’t call it super duper because of his skipping over the 1968 Fair Housing Act at a fair housing-focused hearing, but it was solid overall in total. I certainly give him a lot of grief but credit where credit is due applies.

Here is someone’s take shared with me on the hearing:

Upon reflection, I would like to note that the bulk of the questions were directed to the white panelists, especially by white members of Congress. I don’t recall any white members of Congress asking a single question of Ms. Rice or of the representative of REVAA, who is African American.

I would also note that the preponderance of questions were directed to the late-entry Mr Peter, of AEI, whose testimony gave most of the members of Congress who called on him proof of their confirmation bias. He used a sample set of 240K refi appraisals to reach his conclusions. The universe of refinance appraisals for third quarter 2021 alone was 1.99MM mortgages, down from 2.25MM in 2Q 2021. Based on these numbers (will send reference if needed) an average of 2MM refinancing loans took place each quarter for 2021, for a total of 8MM refinancing loans, each with an appraisal.

A sample set of 240K appraisals over a volume of 8MM is 3%. That is not statistically significant and is not an indicator of the absence of racism.

Listening to his Q&A, he also more than implied that minorities couldn’t handle the wealth of higher valued homes, and that minorities divorced more leading to foreclosure. Another point he made was that minority neighborhoods were relying on the government to make loans work for them/bail them out. Peter also stated that “undervalue = more value”, & that the contract prices is not an indicator of market value. All of the other witnesses, in particular Joey, re-iterated that contract price is the most important data point and is indicative of market value in all markets.

Other notes about Peter’s testimony are: his assertion that other AI models could be biased but that his algorithm is not; and that there is “gaming” among models but he can’t prove it.

I would also casually note that the pronouns “he/him” were used consistently in questioning and by the witnesses, with the exception of Ms. Rice. If there is ever an example of bias, there we have it. Appraisers are men.

OFT (One Final Thought)

One paranoid thought on data:

@secretmiddlemanager #office #officelife #work #career #workthisway #careertiktok #mindsetmotivation #productivity #careeradvice #careertok #businesstiktok #leadershipdevelopment #leadership ♬ Epic Motivational – StereojamMusic

Speaking of paranoid:

Brilliant Idea #1

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– They’ll be more alien;
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Brilliant Idea #2

You’re obviously full of insights and ideas as a reader of Housing Notes. I appreciate every email I receive and it helps me craft the next week’s Housing Note.

See you next week.

Jonathan J. Miller, CRP, CRE, Member of RAC
President/CEO
Miller Samuel Inc.
Real Estate Appraisers & Consultants
Matrix Blog
@jonathanmiller

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