Playing "Chicken" With The Housing Market

Playing “Chicken” With The Housing Market

After my trip to China two weeks ago and last week’s cop-out Happy-Thanksgiving-without-any-content Housing Note, I needed to double down and return to the working world, providing information, insight and of course, transitioning from turkey to chicken (despite the shortage of chicken data). And be sure to use quotes for maximum effect.

Another reason inventory rises and falls

One of my go to sources of housing insight is John Wake, former (International Agricultural Trade) economist and now real estate agent. He always has a great way of conveying information.

In this video he speaks about how rapidly rising home prices cause consumers to delay placing their homes on the market. We can see this in Manhattan’s market from the 2013 bottom through 2015. Finally in 2016, the expectation set in that home prices weren’t going to rise as much and sellers began to think this was a time to cash out. Manhattan re-sale inventory is upon sharply in 2016.


And John Wake’s explainer video:

Matrix Blog Has Been Jump Started

Since I began this weekly Housing Note newsletter nearly two years ago, it’s been a labor of love and I let my Matrix Blog suffer. I don’t know whether it’s the holiday spirit but I started to put more love back into it with more regular blogging in recent weeks. If you’re interested, you can get posts through RSS, have them emailed to you or get them through my twitter feed.

Here are some recent posts on Matrix

Declaring A Housing Recovery Using A Threshold Based on Fraud
China: A Housing Market Without Re-sales?
YIMBY: Low-Income Housing
Market Optics Over Facts: “Greenwich, CT is Vibrant and Active”
NYT Calculator: Suburban Sales Boom Measured By Houses on Monopoly Board

No 7-Year itch: A few more thoughts on the China housing market

After returning from China a few weeks ago, I’ve had some time to reflect on their housing market, which is perceived to be a massive bubble. I wrote about the phenomenon of limited re-sale activity there. It is a buyer orientated market with holding periods expected to be across multiple generations. In the U.S. it is commonly held that the average length of stay of a home owner/occupant is 7 years. I think it’s more like a decade or more given the persistence of tight credit conditions and only recent signs of wage and household formation growth. In China, housing turnover seems nominal.

In other cities, we see similar levels of relatively low real estate market liquidity. 2016 projections, estimate Shanghai unit turnover at under 2.7%, Tianjin at 3.4%, and Xiamen at 2%. This would equal cyclical turn over rates of 37.6, 29.6, and 50.3 years.

And consider the proliferation of divorce fraud in China. Buyers will readily get a divorce to skirt the 1 investor home purchase rule per household and then remarry afterwards (I’d be too worried my wife wouldn’t remarry me). But the government is cracking down on divorce fraud and applied some significant mortgage restrictions to reign in the bubble (like requiring 70% down).

From the WSJ – Average home prices in Shanghai, shown, were up 27.5% in October from a year earlier, outpacing the 18.2% price increase across 100 Chinese cities.

Here is a photo I took on a high speed bullet train between Beijing and Shanghai. For much of the 5.5 hour ride, there were new buildings constructed on both sides of the tracks.

[click to expand]

Mortgage Rates Have Been Rising

While mortgage rates have been rising since the election, that doesn’t mean housing prices will fall. The fact that rates are rising (I am skeptical that there is a lot more of that coming), means that the economy is perceived as improving. The hope is that there will be a “soft handoff” from a low rate to higher wage growth.


A modest rise in mortgage rates will go a long way towards normalizing credit conditions which then widens the foot print of those who can take advantage of low mortgage rates. Ever wonder why mortgage volume has been sliding along with rates?

What Happens if Young People Never Buy Homes?

I came across this discussion in Vice Canada (wait, is there really any “vice” in Canada?) – what would happen if millennials simply stopped buying houses. It’s an intriguing question since the homeownership rate may have stopped falling after non-stop hand wringing about it since the financial crisis – that we are moving to a rental society. I believe the key driver of the shift was tight credit conditions.


“Aspiration Pricing” Transitions to “Offensively Overpriced”

If you’ve been a regular reader of these Housing Notes you know I have long tried to get into the urban dictionary with new housing phrases like “high plateau” and “aspirational pricing.” The latter refers to the lack of shame of home sellers who list their homes for impossibly high numbers and don’t ever seem to sell. In this great read on the phenomenon now as re-sale inventory is rising. This Bloomberg article is chock full of good quotes and a good chart: Manhattan Homeowners Are Looking for 40% Returns—In Just Five Years

Sellers tend to be later than buyers to the new market condition (duh).

“In my experience, it takes sellers a good one to two and a half years to believe in the new market,” Miller said. “The buyers are with the program immediately.”

…said Rachel Altschuler, a broker with Douglas Elliman. “Of course, every seller thinks theirs is the most most unique, amazing property on the market, so you have to be prepared to say the things they don’t want to hear.”

“There’s a conversation to be had between buyer and seller — as long as you’re not offensively overpriced,” said Scott Harris, a broker with Brown Harris Stevens.

And re-sale inventory is rising which leaves those offensively overpriced (LOVE THAT PHRASE) listings dangling in the wind. Current buyers remain too nice and won’t make an offer on listings that are wildly overpriced. With more inventory to choose from buyers simply move on to the next listing that is more realistically priced – which infers a more realistic (and reasonable) seller.


What makes a street, a street?

The naming conventions for streets and avenues has always intrigued me. In a housing market like Manhattan, a single family home is less valuable on a wide well-traveled avenue versus a street which tend to see less traffic. Take Park Avenue in Manhattan. A single family (Townhouse) is generally less valuable than the same house located around the corner on a street.

Here’s a great Vox explainer video on this. And don’t get me started on crescents!

Post-Election Manhattan Market Anecdotal Out of Context Update

I’ve long said that the biggest change to the housing market after the election is over is the fact that the election is over. Some ridicule the idea that using the the term “uncertainty” is a crutch and means nothing. I’m not sure about that. Mortgage rates jumped and consumers are refinancing and seem to be pulling the trigger on purchases (anecdotally) a lot more in the past few weeks.

One of my appraisers got this comment from an agent of sub-million Manhattan listing that just got the contract signed:

we had 10 above ask all cash offer

And the Wall Street Journal seemed to base the post-election resurgence in downtown Manhattan on a press release about 5 contracts signed at a new development known as 30 Park Place. We do not know the discounts they were offered, if any or other details. The article goes on to link commentary made before the market corrected in 2014 with now. Still, I do think we could see an uptick in sales with the election out of the way as a release of pent-up demand.

Here is a chart I discovered that was based on data published by our firm (which includes recent closings of old new development contracts).



Form versus Narrative

Well it’s been a couple of weeks since I’ve actually appraised – with vacation and the holidays. Next week I’m going to inspect what could be a $50 million single family townhouse in Manhattan. I have been in townhouses worth double that but I always marvel at the idea that I can do it on a form. Think about the size of the dollar amount that a 5% or 10% adjustment infers, yet we do it just like it was a $700,000 property in the suburbs. It just fits. For single family appraisals outside of mortgage lending on very high end properties, I find it amazing that some appraisers rely on narratives, or have convinced their clients the format provides more information and insight.

It’s a running joke in our firm that a narrative appraisal report of single family properties in my market – often by SRA and MAI designated appraisers – seem to be about 98% boilerplate and 2% content. We call those reports “appraisals by the pound” because the intent is to justify a higher fee for more “bulk.” That’s ridiculous. We beg clients not to require them for single family appraisals and are usually successful.

I remember once an appraiser in my market with a terrible reputation was on the witness stand in a divorce case for opposing counsel. He actually said that a narrative format provides more information and therefore I was deliberately misleading the court by using a form. Of course I had a field day with this and used my description of better as a narrative appraisal argument as “appraisal by the pound” as a way to get a higher fee. I got a laugh out of the judge and felt I played a role in a very favorable outcome for our client. That same appraiser actually called me a few weeks later for comps. It was as if he became a different person when under oath. I won’t help or be associated with that type of person. I enjoy a great relationship with appraisers in my market who make a living criticizing each other’s work in court. As long as there is a decorum of professionalism and no personal attacks, I take it as free advice to make me better. And from my perspective, forms are better for single family property appraisals.

“Modernizing Appraisals” is the new catch phrase?

No offense to the participants in the recent appraisal-related testimony in Congress but I found it strange that no actual appraisers were included for a discussion on appraisal reform. Voice of Appraisal’s Phil Crawford mentions it in his always must to listen to podcast.

There are a lot of great appraisal posts in the links below.

A Brilliant Idea

If you need something rock solid in your life (particularly on Friday afternoons) and someone forwarded this to you, sign up here for these weekly Housing Notes. And be sure to share with a friend or colleague if you enjoy them. They’ll make yo-yoing look easy, you’ll understand the difference between yams and potatoes after Thanksgiving and I’ll get better at parallel parking.

See you next week.

Jonathan Miller, CRP, CRE
Miller Samuel Inc.
Real Estate Appraisers & Consultants

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