The Basis Point Analogy of Swings in the Housing Market

I was out the office this week from Tuesday through Thursday and gearing up for the “Q2-2019 Market Report Gauntlet” that begins early next week, so some of my tweets did the heavy lifting.

NAR’s non-seasonally adjusted existing home sales rose year over year for the first time after eight months of annual declines. The ±75 basis point drop since this time last year had a lot to do with the growing momentum in the swing towards more demand. As more basis drops onto the market rope, participants jump into the market from their safe platforms as enthusiasm grows. The lack of inventory weighs down the participants with more price risk until everyone gets soaked. Hopefully, no one gets hurt but our valuation model ended unexpectedly so we aren’t sure how this plays out.


But I digress…

New York State Rent Law Will Be Challenged as a ‘Taking’

Because of the new rent law’s perceived overstep by multi-family building owners, we expect to see a lot of litigation in the future. I can’t emphasize how catastrophic this will be to the New York City housing stock as the law is written. This was a good-faith effort to preserve affordable housing but it will likely create several outcomes detrimental to the original intent. I’ve written on this before but have had more time to process the ramifications:

– Jump in cap rates which would crush multi-family building values because all incentives for rental price upside by making capital improvements have been eliminated, sending NYC back to the “In Rem” housing crisis of the 70s and 80s, where the landlords, especially small building owners, walked away from their buildings. Constrained by caps on rent increases as expenses rose faster removed all incentives for ownership and maintenance. This is a repeat scenario
– Sales of multi-family buildings will essentially stop as the incentive for ownership has been removed
– Construction of new rental buildings will fall sharply given the loss of incentives and the harsh anti-landlord political zeitgeist
– With the removal of ownership incentive, the number of rent-regulated apartments will decline as rental to co-op conversions jump. Perhaps not as frenzied as the 1980s boom but there should be more of this. Current public commentary on this issue is being made by developers who have no experience in this new world
– Rental conversion to co-op will expand despite the 51% from 15% new requirement for insider votes. The reason? Back in the 1980s I recall that a large portion of conversions during that boom era saw greater than 51% conversions despite the 15% threshold because Fannie Mae financing required it
– Rental housing stock will decline as conversion activity rises. However, the unintended consequence of the conversion activity will bring more affordable “for sale” housing stock to the market, something sorely lacking before the law change. The 51% ensures that insider discounts will be closer to 50% than nominal discounts from the outsider price. Also, the insider pricing of those fortunate 51 percenters will enjoy instant equity to fuel additional housing sales
– The city is highly dependent on real estate transfers so the drop in multi-family sales volume could reduce real estate tax revenue to a city that is expanding spending at a record break pace to resolve issues like transportation infrastructure. Spending will need to be cut back or borrowing will need to increase.
– The City of New York’s reputation worldwide has already taken it on the chin by creating an anti-development, anti-investment reputation from the failed Amazon deal, proposed but withdrawn “pied-a-terre” tax, the new transfer and mansion tax and now the new rent law, all within the last 9 months. That’s tough to undo and is brand damaging to the City.

The first sign of an industry push back will be a lawsuit to be filed in mid-July where it takes the form of government property “taking”.

It’s unclear whether Cuomo will be named as a defendant, but the case will argue that his new rent law violates owners’ constitutional right against the “unlawful taking of property,” sources said.

It’s Not Like Nothing Is Selling

This Bloomberg story illustrated how important context is when measuring value, even when the comparison is a little out of context. A new development on the Upper West Side configured as a rental building with smaller units in the configuration, is in close proximity to Billionaires Row. The marketing narrative is to show how much less expensive this new condo project is than ‘Billionaires Row’ pricing even though it is in close proximity. However, it doesn’t have the same expansive views or the height than most of the Billionaires Row units have. But it does introduce additional smaller condo units to the market and that is a refreshing change from the steadfast overemphasis on super luxury units far into this market cycle.

Are People Still Flipping?

Yes, they are but in places you wouldn’t expect. When I read this U.K. WSJ article on condo flipping activity: British Contract Flippers Stymied by Faltering London Market, I was taken aback at the volume scale of property flippers in the Brexit UK. I wanted to say “Doh!” to the title but was amazed at the scale of the flipping activity.

But my tweet paid homage to the structure that was being converted. Think “Pigs on the Wing.” The lyrics kinda provide a visual for the end of a flipping era.

Getting Graphic

Len Kiefer‘s Chart Handiwork

Not the word “exemption” in 2019 i.e. $10k cap on SALT.


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


All appraisers need to provide their opine on this request. It is obvious why its a disaster and you need to share why right NOW to show our industry is concerned!!! At last count, there were only 24 comments!!!

Click here.

Incomplete Data Provides Incomplete Assumptions

In meetings with the National Association of Realtors and The Appraisal Foundation this week, there was a lot of time spent listening to AVM owners espousing their importance and more sober observations of the pitfalls. One of the presenters seemed to be bragging that 90% of the time, a good Automated Valuation Model (AVM) can be within plus/minus 10% of the actual value. Remember that Zillow’s Zestimate is within 5% of the actual value only 50% of the time. Both numbers are very dreadful and very random inconsistency across the marketplace.

But still, there is a place for their use in conjunction with appraisers, just not to the intensity being touted now, especially as their data gets polluted going forward by the impact of waivers.

Here’s a simple scenario on how data pollution works and in large scale has the potential to cause bubbles in the future – a sales transaction is given a waiver by a GSE and the sale happened to sell for 5% above current market conditions. That sale closes and is used by AVMs AND BY APPRAISERS as a valid comp. Multiply that by tens of thousands of transactions and we are creating unnecessary market volatility.

There was an excellent guest speaker from Columbia University, Josh Panknin who made the following observations about “big data” and the current wiz-bang “overhype” that seems to be threatening the future of appraisers.

– Computers can’t fill in the blanks
– Computers can’t do qualitative (my interpretation- i.e. views and condition despite UAD).
– Incomplete data give us incomplete answers (so throwing more data at big data does not resolve that problem).

He also used a “turkey sandwich” metaphor for AVMs.

The quality of this sandwich of bread, cheese, turkey, and mayo get better by improving the quality and components, not by moving around the items.

In other words, we don’t improve quality by simply swapping out technologies.

Sidebar: AVMs Have Trouble Considering Natural Light

Josh Panknin also provided a paired sales discussion about differences in natural light.

Maureen Undoes The Misrepresentation of Appraisals At The House Panel

Chicago appraiser and friend (even though she calls me “fancy pants”) writes a stellar explanation of what an appraiser actual does – and what one of the panel experts got completely wrong because he didn’t understand our role in the mortgage process:


Greetings Congresswoman Waters, Chairman Clay, Ranking Member Duffy, Ranking Member Gooden, and the Members of the Housing Subcommittee:

My name is Maureen Sweeney, and I am a real estate appraiser. I grew up in a real estate family and lived through the savings and loan crisis of the 1980’s, which had a profound impact on my life. I witnessed first-hand illegal and unethical behavior in the real estate and mortgage industry towards homeowners. Through that experience, my greatest concern was, “who is protecting the public?”. In 1989, Congress enacted Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). With this decision by Congress, I decided I wanted to be an appraiser. The appraisal profession was and still is the profession in the mortgage industry that promotes and maintains the public trust in housing finance. We are the first profession in the mortgage industry that was licensed, and we are the only profession that is regulated by Congress.

Because of FIRREA, all appraisers who develop opinions of value for federally related transactions must follow the Uniform Standards of Professional Appraisal Practices (USPAP). What was originally intended as assignment conditions for federally related transactions is now partially or fully embedded in all states’ appraisal laws.

USPAP states in the Ethics Rule, “An appraiser must not use or rely on unsupported conclusions relating to characteristics such as race, color, religion, national origin, gender, marital status, familial status, age, receipt of public assistance income, handicap, or an unsupported conclusion that the homogeneity of such characteristics is necessary to maximize value.” (Lines 200 – 202, USPAP 2018-2019 Edition © The Appraisal Foundation). The Fair Housing Act of 1968 prohibits discrimination concerning the sale, rental, and financing of housing based on race, religion, national origin, or sex. All states have laws that prevent discrimination. If an appraisal professional basis their assignment results on race, they can lose their license and may go to jail.

Appraisers develop the Valuation Process in each of their assignments. Each step in the Valuation Process builds on the previous step, so at the end of the report, there is a logical conclusion so those who rely in the report can understand how the assignment results came to be. This 8-step process includes:
1) Identifying the Problem; this includes determining who is the client, who are those who can rely on the assignment results, why is the report needed and how will it be used, what is the effective date of the assignment, what are the characteristics of the property such as the address or legal description, and what are the assignment conditions.
2) Determine the Scope of Work: this is the type and extent of research and analysis in an assignment.
3) Data Collection and Property Description: this is the step where appraisers collect data on the market, data on the subject property, and all data on comparable sales and listings that will be used in the report.
4) Data Analysis: this step includes determining the Highest and Best Use of the property as well as analyzing the market of the subject property. In this step supply and demand are analyzed, inventory levels and marketing times are determined. The data is verified. When appraising for federally related transactions, the closed sales data must be verified through two independent sources, such as the local multiple listing service, the recorder of deeds, or local newspapers.
5) Site Value Opinion: In this step, the appraiser determines the cost of the land where the property is located.
6) The Applications of the Approaches to Value:
a. Cost Approach: this step derives value by estimating the current cost to construct a reproduction or replacement of the existing structure, including entrepreneurial incentives, deducting depreciation from the total cost, and adding the estimated land value. How much does it cost to build the same or similar property? The Cost Approach addresses this question.
b. Sales Comparison Approach: this is the process of deriving a value indication for the subject property by comparing market information for similar properties with the property that is being appraised. The sales comparison approach is based on the [principle] of substitution, which states that a buyer will not pay more for one property when several similar properties are available; the property with the lowest price will attract the greatest demand. What’s my house worth when compared to my neighbors? The Sales Comparison Approach addresses this question.
c. Income Capitalization Approach: this step converts income to value. How much money can I make from this property? The Income Capitalization Approach address this question.
7) Reconciliation of Value Indications and Final Opinion of Value: in this step the appraiser analyzes the information reported previously in the valuation process and selects a final opinion of value, which may be a value range or a specific number. If the market is oversupplied and prices are declining, the final opinion of value may be on the lower end of the value range. If the market is undersupplied and prices are rising, the final opinion of value may be on the high end of the value range.
8) Report of Defined Value: this is the last phase of the valuation process. The defined value is stated as of the effective date that was identified in Step 1.

All appraisals have a signed certification. The certification states that the appraiser has personally conducted the appraisal in an unbiased, objective manner in accordance with USPAP. The certification states what the appraiser did or did not do. A signed certification is important because it clearly states the role of the appraiser, thereby clarifying that the appraisal was done by an individual who is impartial, objective, and unbiased. The certification must be signed by the appraiser. Once signed, the appraiser is legally bound to the appraisal.

On June 20, 2019 at the U.S. House of Representatives Committee on Financial Services, Subcommittee on Housing, Community Development, and Insurance at their meeting: “What’s Your Home Worth? A Review of the Appraisal Industry.” Mr Andre M. Perry was one of the five witnesses to testify. Mr. Perry is not a licensed appraiser, yet Mr. Perry concluded that “owner-occupied homes in black neighborhoods are undervalued by $48,000 per home on average, amounting to $156 billion in cumulative losses.” As an appraiser who deals with data, I was very interested in his claim, as well as the basis for his conclusions.

In Mr. Perry’s written testimony, page 2, Figure 1, titled “Neighborhood median home value by black population share”, Mr. Perry data sources were property listings from Zillow and the value estimates provided to the Census Bureau. Mr. Perry did not provide values determined by licensed appraisers or any apparent recognized valuation method or technique. Zillow was sued in Illinois in 2017 (Vipul P. Patel., et al., v. Zillow, Inc and Zillow Group, Inc., Case No. 17 C 4008) and appealed in 2018 (United States Court of Appeals for the Seventh Circuit No. 18-2130). Zillow explicitly points out that Zestimate does not constitute an appraisal and is what it sounds like, an estimate. An estimate is not an appraisal, nor does it resemble any method or technique recognized by Congress or regulators. An appraisal is, “(noun) the act or process of developing an opinion of value; an opinion of value. (adjective) of or pertaining to appraising and related functions such as appraisal practice or appraisal services.” (Lines 59 – 60, USPAP 2018-2019 Edition © The Appraisal Foundation).

In his written testimony to your committee, Mr Perry notes on page 2, Figure 1 that the 2016 median list price was provided by Zillow. List price is what a seller is offering their property for sale. List price is not sale price. Sale price is a fact; list price is a suggestion. Rarely do properties in a balanced or declining market sell for above their list price. List price to sale price ratios were not profiled or discussed in Mr. Perry’s study, nor was any final sale price data referenced or profiled. In Figure 1 of his written testimony, Mr. Perry used “Census Bureau” for Median Value, rather than sale price data or appraiser’s conclusions. The Census Bureau is not a valuation agency and obtains their data via a survey. Per the U. S. Census Bureau, the market value is, “the respondent’s estimate of how much the property (house and lot) would sell for if it were for sale.” ( ). An estimate is not an appraisal. [Homeowners] may or may not know the true value of their properties, because they are not valuation professionals, and they have a personal interest in their property. With only Zillow’s list price data and the Census Bureau’s homeowner estimates of their property’s worth, the study lacks any reliable value indicators. None of this data supports discontinuing the use of individual appraisers in preference for using Automated Valuation Models, as Mr. Perry suggested in his opening statement and throughout the hearing.

Is there a problem with poor and underserved communities in the United States? Yes. Is it the appraisal profession’s fault? No. The systematic practice of redlining (licensed broker issue), loan rejection (lending issue), and property taxes (assessor and county taxing agency issue) have nothing to do with the appraising of real property for federally related transactions. Entire neighborhoods fell victim to predatory lending, subprime mortgages, and mortgage fraud, with most of the mortgage loans generated with loan amounts below the de minimis of $250,000, which made them qualify for appraiser-alternative products, including AVMs. There were a whole lot of non-appraisal related issues presented in Mr. Perry’s data. It’s sad that the label of racism got pinned on the only profession in the mortgage process who is charged with protecting the public trust.

It’s like blaming the canary for the bad air in the coal mine or blaming the mirror for your bad hair day. Appraisers reflect the market; we do not create it. We observe, we verify through credible sources and analyze our data, and we report our findings in a manner that is meaningful and not misleading.

It comes down to data and how the data is collected and analyzed. In his opening statement, final statements, and throughout the hearing, Mr. Perry championed the use of AVMs. None of the data presented by Mr. Perry in his written testimony to this committee supports the discontinued use of individual appraisers over AVMs. This presents a question: since Mr. Perry relied on data from AVMs and Zillow, is race baked into these systems and their data? Algorithms and machine learning are built on historical data, which is primarily human driven. Machines may and have been shown to amplify bias in data. If racism has been perpetuated for decades in real estate, then it’s baked into the system and the data, therefore what kind of data will we get from the machines? Some hope that Big Data will save us from the mistakes made by humans. The humans who provide valuation services are licensed by their individual states and regulated by Congress. The licensed humans can lose their licenses, get heavily fined, or go to jail for unethical or incompetent appraisal practices. Who’s regulating Big Data when Big Data makes mistakes?

Today we know that 85% to 90 % of all mortgage transactions backed by the federal government and U.S. taxpayers are currently not subject to the protections Congress enacted through Title XI. Big Data companies that provide AVMs are not regulated. Their valuation process and sources of information are not verified, regulated, or publicly available. How does relying on an unregulated private industry running aggregation models protect the public trust? I don’t believe it does.

The appraiser is central to the checks and balances in the home lending system. The appraiser is hired by the lender to ensure that there is value in the property being used as collateral by the lender to provide funds to the borrower. The licensed broker/Realtor negotiates the price of the property, but they are not qualified or licensed to determine the value. Providing valuation services is the appraisal professional’s job. The appraisal professional provides checks and balances in the housing system, as the appraiser is entirely unrelated to the transaction and is not paid based on the amount of the valuation nor contingent on the closing of any loan.

Public trust is key in promoting the stability in the housing market. The continued reliance of unregulated aggregators and bifurcated products continues to erode the public trust at the expense of discarding the profession specifically intended to promote the public trust. How does this protect the public? The appraisal profession is at risk with this policy change. More important: the public is at risk with this policy change and the continued lack of reliance of the appraisal profession.

David Bunton from The Appraisal Foundation said it best to this committee: “The last thirty years were witness to federal agencies doing their best to circumvent using these trained professionals. Likewise, the government sponsored enterprises are taking on riskier practices that leave appraisal protections on the sidelines. Through exemptions, appraisal waivers, promoting evaluations in lieu of appraisals, and encouraging lenders to use unlicensed individuals, the federal financial institutions regulatory agencies estimate that a mere 10 to 15 percent of all mortgage transactions backed by the federal government and U.S. taxpayers are currently subject to the protections Congress enacted through Title XI. ”

I ask again: How does relying on an unregulated private industry running aggregation models protect the public trust? It doesn’t. The reliance on Big Data, the acceptance of hybrid and bifurcated appraisal reports, the potential rising of the de minimis from $250,000 to $400,000, and the lack of hiring the profession that is charged by Congress to promote and maintain the public trust in the housing industry, is a bad direction for our industry and our country. Please do all in your power to protect the citizens of the United States and prevent the next housing crisis.

Thank you for your time, your service, and your continued interest in protecting the public trust.
Maureen Sweeney

OFT (One Final Thought)

This photo shows how serious and good library humor can be (I’ve got all the 1960s Batman TV shows on my iPhone). Just ask my wife about libraries and humor. Our first date was at the university library and she thought I was kidding – but I had a paper due on Monday.

Brilliant Idea #1

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– They’ll want more Natural Light;
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– And I’ll go to the library.

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
Miller Samuel Inc.
Real Estate Appraisers & Consultants
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