The Housing Market As A Donut Hole, Holiday Mall Edition

About six years ago I tried to convince others that the Manhattan housing market was a “donut” – vibrant in the starter market and relatively strong on top, but soft in the middle. A few people suggested that a barbell analogy was more accurate, but hey, I like donuts. But now with rising mortgage rates, we are seeing early signs of a sales slowdown in the starter market. But donut hole sales continue to hold their own. Even HUD mentioned a “donut hole” analogy

Whatever this all means, I suspect with all the holiday decorations it will be tough to focus on any form of intensive donut analysis.

But I digress…

Getting Malled On Video

I hate going to our local mall, especially around the holidays. I’ve written about this before, but malls were an important part of my childhood. When we lived in Delaware in the late 1960s, the big brand new Blue Hen mall in Dover, an hour away, was the only place to buy most of our clothes and basic staples. That mall has now gone under and is being re-used as something else. Later when we moved to the Maryland suburbs of D.C. the big new Montgomery Mall was the regular place to go. In fact, when I was home for the holiday break during my college freshman year, I walked through the mall looking for work and landed a 3-week busboy gig at a Greek restaurant.

Later on in my life, I used to go to the Stamford Town Center mall all the time to run errands. Then big box stores entered our local market, Amazon gained critical mass and now I visit it only a few times a year, mainly to the Apple Store. I always find the mall visit depressing so I avoid it all costs.

Nationally malls are failing much faster than being created. A report by Credit Suisse estimated that 20% to 25% of malls would shutter over the next five years, largely because of store closures. Currently, there are about 1,100 malls nationwide.

However, there are some that yearn for the old days. I’m not one of them but I can see how impactful growing up with them can be to some.

The first video was made in 2007 and covers the folks who created Periodically, I check into the DeadMall YouTube feed for a quick update. It is mindboggling how much space goes unused. The second is a 2009 documentary on the shift in retail patterns away from malls. It is super depressing.

Combined Apartments Can Be The Single Best Thing

For my entire 32-year appraisal career, our firm has been valuing combined apartments. I came up with the saying “1+1=2.5” to reflect the value premium enjoyed by purchasing two adjacent apartments, whether or not they were combined. The premium varies widely based on the size and configurations of the apartments. This premium doesn’t apply to all combos but since there is a Manhattan premium for larger contiguous space. I’ve found that once the total size approaches 7,000 square feet, there is no premium, and in fact, the impact on a price per square foot basis often falls.

This weekend’s New York Times Real Estate Section cover story “Hey Neighbor, Can I Buy Your Apartment?

In my own experience, these are the issues and observations with combos:

– As I said earlier, there is generally a premium enjoyed by acquiring the neighbor’s apartment, even before they ae combined.
– Usually, the larger apartment owner is acquiring the smaller apartment (say a 3-bedroom owner’s purchase of a studio) and therefore it is likely they will need to significantly overpay for the studio. But the premium enjoyed afterward can make that a no-brainer.
– Co-ops tend to leave the building Certificate of Occupancy alone with the idea that if the market softens or the owner falls on bad times, they can easily sell off the smaller apartment.
– We often perform three valuation opinions to lenders: “as is” appraisal of each apartment and a “subject to combination and renovation” of both apartments” value. In the early 90s we ran across a few fraud scenarios where one bank held the mortgage of each of the individual apartments and a second bank held the combined mortgage for both apartments. I never understood how that could have happened in a co-op.
– Often in a combo scenario, additional common hallway area is purchased from the co-op to make the layout better.
– I believe the goal of the combined layout is to provide something that doesn’t “feel” like a combination of two or more apartments. That’s hard to do.

The following two posts were shared earlier this week on my Matrix Blog.

Bloomberg Markets TV: December 18, 2018, Amazon HQ2

As always, I had a wonderful conversion with Vonnie Quinn, anchor of Bloomberg TV’s Markets this week. It was a lengthy interview where we discussed national and NYC metric trends. The following portion covered the Amazon HQ2 story in Long Island City, NY.

Elliman Magazine Winter 2019 – Market Update

The Winter 2019 Issue of Elliman Magazine was just released. I provided a two-page spread showing various market tidbits on random U.S. markets where Douglas Elliman has a footprint. The magazine is well done and a good aspirational read.

[click to expand]

Here’s the full online version of the magazine:

Getting Graphic

Favorite charts of the week. Time to look at the aggregate of the 5 boroughs:


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

An Extraordinary Year For Appraisers

Some thoughts about what we learned from 2018 to apply to 2019:

– We have always been our own worst enemy as evidenced by the behavior of AI National who kept thinking up initiatives for its members without asking for membership feedback – remember this when their “taking” initiative is attempted in 2019.
– Through Appraiserfest and a vibrant appraisal coalition network, we are learning to fend for ourselves and find we all actually like each other.
– State level political action was the battleground as AI National’s Scott DeBiasio continued to work hard for AI National to further devalue our profession with evaluations.
– Regulators and the GSEs pushed hard to normalize appraisal waivers or push wildly inaccurate and inefficient appraisal replacements like AVMs and hybrid reports, viewing us as about the same as obsolete television repairmen. Their irrational logic that ignores quality damage completely, making me wonder if this is being done at the behest of the Corelogic and other data monopolies who have a big lobbying presence.

Remember that appraisers are here as the last line of defense to the consumer and to the taxpayer, yet we have a limited voice. Our progress for more transparency in 2017 & 2018 showed us we could have more of a voice. In 2019, we will continue to more effectively press the quality concerns that are being driven into the ground by most existing insitutions after moral hazard was established in all the 2008 bailouts.

Dave Towne on De Minimus


Yesterday, I sent out a message about a Fee/TT quote conversation I had with an AMC clerk.

I’ve received a number of responses from appraisers across this fruited plain who said often they will receive Fee/TT quote requests for the SAME property from MULTIPLE AMC’s. That corroborates stories I hear from appraisers I talk with at conferences.

The entire AMC situation is a giant time-wasting game that really doesn’t benefit the borrower at all, and least of all, appraisers. Lenders are the coaches in this game.

Another message I got today caused the tiny little light bulb in my gray matter to explode in brilliance. The last paragraph is key to the raising de minimus shenanigans being promoted lately, backed by….you guessed it…..lenders:

“What you may not see is that there are Lenders that also agree with your statements. However because of all the noise, miscommunication and regulatory interference everyone is starting to just give up and/or default to a legacy AMC model and then micromanage the process. Those same lenders will be the ones that jump on the De Minimis increase and eventually be insolvent at the next market crash.

The De Minimis level was raised to solve a regulator burden created by Regulation, they can’t roll it back so they just make the filter larger.

Prudent Lenders will still get appraisals, the real question is what kind of appraisal? One that complies with USPAP or one that Doesn’t, and who is going to prepare it. Evaluations still require a level of competency under that Regulatory requirement.

Keep in mind USPAP is a road map to a repurchase lawsuit, a non USPAP appraisal isn’t. Lenders are tired of paying legal expenses for USPAP experts to line up in a courtroom and argue if a report and the appraisers workfile complies or not.”

In other words, USPAP is an impediment to the financial bottom line for lenders. To avoid spending thousands to millions of dollars going after licensed appraisers over allegedly faulty appraisals, they are attempting to get the de minimus raised so that EVALUATIONS used to value properties won’t face the same investigative and legal issues.

~ EVALUATIONS do not have the same regulatory burden as appraiser’s USPAP compliant appraisals.
~ People who perform EVALUATIONS are not licensed by the states.
~ “Competency” is mentioned in the Agency regulations, but who monitors that?
~ EVALUATIONS may not cost as much as a regular appraisal.
~ People who do EVALUATIONS may not have the high level of property analysis training as appraisers have.
~ When faulty EVALUATIONS are produced, it will be up to the borrower to bring charges against the lender – which probably will happen less frequently than lenders going after appraisers. So the lender will save money on legal defense.

The other issue here, that just dawned on me, is what do lenders call property valuation costs when a borrower applies for a mortgage loan? All lenders have a line item on loan requests for “appraisal cost.” Appraisal is a legal term that has a specific meaning. By regulation, the ‘appraisal cost’ must be identified to the borrower up front, after the time of application.

But if the lender is NOT actually going to use an APPRAISAL for property valuation (due to prospective value below the maximum de minimus amount), the fee should not be termed ‘appraisal cost.’

Secondly, due to differing production costs, will the fee charged the borrower be equally the same for both types of valuation reports, even though the EVALUATION probably costs less than an appraisal?? Is the lender pocketing the difference? (Pocketing any portion of the borrower paid fee for ‘appraisal’ didn’t use to be allowed; I’m not sure how that currently applies since D-F was signed into law.)

USPAP was mandated by Congress to preserve public trust in the real property valuation process. EVALUATIONS subvert that obligation. (Yes, USPAP also applies to personal property.)

OFT (One Final Thought)

It’s all about the angle you work:

Brilliant Idea #1

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Brilliant Idea #2

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HAPPY HOLIDAYS!!!! & See you next week.

Jonathan J. Miller, CRP, CRE, Member of RAC
Miller Samuel Inc.
Real Estate Appraisers & Consultants
Matrix Blog

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