The Housing Market Is Nothing A Brick Couldn’t Fix
I’ve always wanted to do this, but who wants clean bricks?
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Did you miss last week’s Housing Notes?
June 2, 2023 – It’s A Housing Market Controlled By Dogs, So Don’t Be A Sheep
But I digress…
New York City Continues To See Record Rental Prices
I’ve been the author of an expanding series of market reports for the firm Douglas Elliman Real Estate since 1994. The NYC rental series has been a highly covered report because NYC rents continue to rise as national numbers seem to be receding.
Bloomberg pushed out an article on the May rental results that ended up staying all day at about the 10th most read story on their 325K terminals worldwide (no screenshot). And the article was the third most shared on their public website Bloomberg.com.
But most importantly, the article contained a chart of our data!
CNBC shares the results of our Douglas Elliman May 2023 Manhattan, Brooklyn, and Queens Rental Report on Squawkbox:
The median rent in Manhattan hit an all-time high at $4,360, up 4% from April. @robtfrank joins with more: pic.twitter.com/uHFgWVLwVd
— Squawk Box (@SquawkCNBC) June 8, 2023
Lots of other press coverage occurred – you can check it out here.
Elliman Report: May 2023 Manhattan, Brooklyn and Queens Rentals
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MANHATTAN RENTAL MARKET HIGHLIGHTS
“Median rent pressed higher to new records for the third consecutive month.”
– Net effective median rent and median rent reached new highs for the third consecutive month
– New lease signings surged back to trend after the April banking crisis lull
– Listing inventory continued to expand but remained well below the decade average for May
– Non-doorman median rental price continued to experience more significant year over year gains than doorman median rental price
– The market share of landlord concessions remained larger for new development than existing leases
– The market share of landlord concessions for luxury rentals was about half that of non-luxury rentals
– Luxury listing inventory fell year over year for the first time since last summer
– Lease terms for luxury rentals were at their most extended length since the beginning of 2022
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BROOKLYN RENTAL MARKET HIGHLIGHTS
“Median rent reached a new high for the second straight month.”
– Net effective median rent and median rent reached new highs for the second straight month
– New lease signings surged from the prior month’s lull and rose annually for the third time in four months
– Listing inventory rose year over year for the sixth consecutive month
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QUEENS RENTAL MARKET HIGHLIGHTS
[Northwest Region]
“Median rent was the second-highest on record, just short of the prior month’s record.”
– Net effective median rent and median rent were at their second-highest level on record
– New lease signings surged from the prior month’s lull but slipped annually for the second straight
month
– Listing inventory rose year over year for the third consecutive month
For more, view the chart library.
Because We All Love Tiny Manhattan Apartment Stories
Here is a Greenwich Village rental apartment story. It’s a 77-square-foot apartment without a bathroom asking $1,975 but, after a bidding war, it rented for $2,350 a month. Other apartments share the same bathroom in the common area.
Why would anyone pay this much for a glorified closet? Because who wouldn’t want to live in Greenwich Village? The smallest apartment I’ve ever appraised was 130 square feet on the fifth floor of a walk-up apartment building in the East Village of Manhattan with its own bathroom. The difference between this apartment and the one I appraised years ago was essentially the square footage of the bathroom (7’x5’=35 sqft).
Take a look.
The Compass Chronicles: June 2023 Edition
After a decade of publicly criticizing the business model of Compass and its inability to make a profit, I was email-splained by two of their senior executives who somehow thought I was being paid to go after them. LOL. I informed them that I had been consistent about my skepticism of their business model since one year after their launch. It’s not personal. I just don’t get what makes them different from other full-service brokers. This is why I have dubbed them “Disrupters by Capital.” After all, they hemorrhaged during one of the biggest housing booms of the modern era. To be profitable in a weaker housing market, they presumably have to cut costs lavished on their recruits. I have a lot of broker friends at the company and wish them well. My focus is the business model.
A few weeks after I received those critical emails, One of the execs promised to give me a look at its numbers and two-year strategy to show how they would turn the ship around. A month after that, I got a Zoom tour of what a broker being pitched would see. It was good, but I’m not a broker, and that’s not what I was promised. They never addressed what was promised. So much for transparency. Sigh.
– Two years into going public, Compass still has issues with its books [The Real Deal]
Two years after going public, Compass still has significant issues with its financial reporting, according to statements in its earnings reports analyzed by The Real Deal.
-Zillow, Anywhere and Compass vanish from annual Fortune 500 list [Inman]
A Great Thread About Aspirational Housing Prices
Make sure you watch the short video before reading the thread.
Here's my attempt to hash the theory out.https://t.co/qRrjDSSyxB (@jonathanmiller , as the coiner of the term, I'd love your take!)
— Hiten Samtani (@hitsamty) June 8, 2023
Getting Graphic
My favorite charts of the week of our own making
My favorite housing market/economic charts of the week made by others
The delinquency rate on office building-related mortgage bonds experienced a sharp increase in May, reaching a level not seen since 2018. https://t.co/Mp7lOCbXBW
— Axios (@axios) June 5, 2023
On a seasonally adjusted basis, Phoenix home values rose every single month between Oct. 2011 (i.e. the bottom of the crash) through July 2022 (i.e. the top of the Pandemic Housing Boom).
Since, PHX has posted 10 consecutive month-over-month declines.
But it was just -0.03%… pic.twitter.com/qpvvXdV1DA
— Lance Lambert (@NewsLambert) June 9, 2023
“there are certainly going to pockets of the country that will see more new apartment supply than demand over the SHORT TERM, i.e. the next couple years” writes @jayparsons pic.twitter.com/SZeLnnAymH
— Lance Lambert (@NewsLambert) June 8, 2023
"Americans [are] broadly happy with their own personal finances, but a majority consistently thinks (erroneously) that we're in a recession, and just 18% think the national economy is in good shape" https://t.co/JWO6mjPr7T pic.twitter.com/Zvwh5ExIXZ
— Scott Lincicome (@scottlincicome) June 5, 2023
Hello Mr. Sacks. In case you weren't aware, there are parts of the US economy outside of information technology, and they are all adding jobs. pic.twitter.com/4wqCFEtE4V
— Joey Politano 🏳️🌈 (@JosephPolitano) June 3, 2023
Kastle card swipe data charts
Remember that Kastle charts are overstating occupancy* because their pre-pandemic occupancy benchmark was 100% which is simply incorrect (*measures card swipe activity as a proxy for occupancy).
My favorite random charts of the week made by others
NYC right now ranks as the worst air quality in the world due to smoke from wildfires in Canada. pic.twitter.com/seuakbCCCx
— John Davitt (@johndavittontv) June 7, 2023
NYC right now ranks as the worst air quality in the world due to smoke from wildfires in Canada. pic.twitter.com/seuakbCCCx
— John Davitt (@johndavittontv) June 7, 2023
Looks like the world’s most luxury brands only use capital letters. pic.twitter.com/uhCPEu9EzF
— Trung Phan (@TrungTPhan) June 2, 2023
Upcoming Speaking Events
Appraiserville
Talking About TAF’s Role In The Appraisal Bias Narrative Is A Multi-Channel Effort
Congrats to Emily At BrickUnderground for her NAREE award!
For the uninitiated TAF is the organization that wrote the bat-shit crazy letter, the chickenshit letter and is the subject of an active investigation by HUD on whether USPAP promotes a lack of diversity in the appraisal profession (ranked 400th of 400 professions tracked by BLS in 2021).
After her interview with me, Emily calls TAF for answers, and they give the same tired do nothing that works response under the guise of “taking action.”
PODCAST Racism and the lack of diversity in the appraisal business [Brick Underground]
The Cosmic Cobra Guy Calls Out AVMs
Apparently AVMs are not worthy appraiser replacements or non-bias valuation tools their creators claim.
He’s got a press release and gives my friend Phil Crawford of Voice of Appraisal Podcast a well-deserved shout out.
*** FOR IMMEDIATE RELEASE ***
DAZZLED BY WIZARDRY, FEDERAL MORTGAGE REGULATORS IGNORE ZILLOW DEBACLE
VENTURA, Calif. (June 9, 2023) – Secretary of Defense Robert McNamara was a committed technocrat. Under his direction, a team of policy advisors descended into the Pentagon’s cavernous basement in 1967. They fed punch cards into the basement’s IBM mainframe computers with everything that could be quantified about the Vietnam War. Numbers of ships, tanks, transport helicopters, gunships, fixed-wing aircraft, artillery, troop strength, machine guns, ammo. They queried the computers, “What year will we win in Vietnam?” They went away on a Friday and let the computers work on the problem all weekend. When they returned the following Monday, there was one card in the output tray. It said, “You won in 1965.”
While computing power might have “solved” the Vietnam War on paper, the results clearly didn’t square with reality.
Fast-forward to 2023. Six federal agencies are seeking public comment on a newly-proposed rule designed to “ensure” the credibility and integrity of computer models used in automated real estate valuations. This rulemaking is one more sign that federal bureaucrats are all in on a whacky plan to use technical wizardry to tease out the value of individual properties across the country. The wager? The nation’s $12 trillion residential mortgage market, much of which is now backstopped by the full faith and credit of the U.S. Treasury.
These algorithmic valuations replace trained human appraisers with knowledge of local real estate markets. The so-called “black box appraisals” rely on mathematical formulas and Big Data to produce an opinion of value. The problem? The models aren’t able to think like buyers and sellers. They don’t pick up design flaws, emotion-based style preferences, ambient noise levels, smells, street parking issues, market tastes, perceived quality of school districts and responsiveness of local government. It’s too much to ask of a machine.
Rohit Chopra, director of the Consumer Financial Protection Bureau, rightly sounded the alarm in a recent blog post – the models have the potential to do great harm.
The evidence is there for anyone wishing to look. In a disastrous bet made by Zillow – one in which the company staked its future on investing in residential real estate based on its own algorithms – the company lost $32 billion in market capitalization from February to November 2021. What did Zillow learn about its “Zestimates” when its own money was at stake?
Zillow, a company that gained popularity through its online listings, bet the farm on Zillow Offers, a home-flipping venture that relied on algorithms to identify homes the company would purchase. The plan was to make minor renovations and sell them off quickly for a profit. In a colossal about-face, after a write-down of half a billion dollars, the company announced the closure of the subsidiary, despite it being the primary source of revenue but not profitability. Zillow also reduced its workforce by approximately 2,000 employees, constituting a quarter of its staff.
The company disregarded internal concerns that its algorithms were causing it to overpay for homes, former and current employees told the Wall Street Journal in November 2021.
More than a decade earlier, in one of the first bombshells of the financial crisis, Standard and Poor’s Rating Services abruptly announced it was putting 612 mortgage-backed securities on “CreditWatch negative” and that it expected most to soon be downgraded because of high delinquency and foreclosure rates. Its algorithmic valuation model for the securities was known to spit out investment-grade ratings on junk-quality mortgage-backed securities, after which they could be purchased by pension funds.
Moody’s Investors Service, another purveyor of algorithmic valuations, quickly dropped a similar bombshell. It announced it would be downgrading 399 securities and placing an additional 32 securities on review for possible downgrade. Two days later, Fitch Ratings followed suit, signaling big problems with its own automated valuation models. Many of the once “investment grade” loans were in the portfolios of Wall Street players like Bear Stearns, Citigroup, JPMorgan, Merrill Lynch and Morgan Stanley. Others were held by public employee pension funds as far away as Norway.
In 2009, Calpers, the largest public pension fund in the United States, sued Moody’s, Standard & Poor’s and Fitch for assigning their highest ratings to securities that later suffered enormous losses. The suit would not be settled until 2015. This part of the crisis traces directly to the flawed automated valuations of homes whose mortgages were packaged up in the securities.
The rule now being proposed by six vast federal bureaucracies blithely assumes the holy grail is already in hand – the ability to quality-control imperfect algorithms that can never simulate the workings of a complex market involving millions of buyers and sellers. Until this holy grail is discovered, appraiser and podcaster Phil Crawford believes the automated models will introduce something he calls “data cancer” into the increasingly nationalized U.S. mortgage market. He defines “data cancer” as an echo-chamber effect arising from the proliferation, over time, of distorted values as they work their way into sales data, thereby buttressing ever-more distorted values.
“To paraphrase Hemingway’s quote on bankruptcy,” said Crawford, “the resulting crash will happen gradually, then suddenly.”
The agencies involved in the federal rulemaking include the Federal Housing Finance Agency; the Consumer Financial Protection Bureau; the National Credit Union Administration; the Federal Deposit Insurance Corporation; the U.S. Department of the Treasury; and the Federal Reserve System.
Swedish economist Assar Lindbeck famously called rent control “the most efficient technique presently known to destroy a city—except for bombing,” Were professor Lindbeck still alive, he might now have included the automated valuation of a city’s real estate.
# # #
Jeremy Bagott is a real estate appraiser and former newspaperman. His most recent book, “The Ichthyologist’s Guide to the Subprime Meltdown,” is a concise almanac that distills the cataclysmic financial crisis of 2007-2008 to its essence. This pithy guide to the upheaval includes essays, chronologies, roundups and key lists, weaving together the stories of the politics-infused Freddie and Fannie; the doomed Wall Street investment banks Lehman and Bear Stearns; the dereliction of duty by the Big Three credit-rating services; the mayhem caused by the shadowy nonbank lenders; and the massive government bailouts. It provides a rapid-fire succession of “ah-hah” moments as it lays out the meltdown, convulsion by convulsion.
# # #
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OFT (One Final Thought)
The smoke in NYC reminded me of a book I read years ago, “On a Clear Day You Can See General Motors” but this is the Manhattan Edition.
I love NYC pic.twitter.com/FaA6ueWaEl
— Brian J. Karem (@BrianKarem) June 8, 2023
Check out this almost unbelievable time-lapse of wildfire smoke consuming the World Trade Center and the New York City skyline.
Those vulnerable to poor air quality, including seniors and young children, should limit time outdoors if possible.
More: https://t.co/ChRuWv7X6E pic.twitter.com/mtKtLun8lN
— NWS New York NY (@NWSNewYorkNY) June 7, 2023
if you ever wanted to know what the gw bridge woud look like on mars:pic.twitter.com/zscmcPZp1J
— ian bremmer (@ianbremmer) June 7, 2023
Brilliant Idea #1
If you need something rock solid in your life (particularly on Friday afternoons at 2 p.m.) and someone forwarded this to you, , or you think you already subscribed, sign up here for these weekly Housing Notes. And be sure to share with a friend or colleague if you enjoy them because:
– They’ll be a washing machine;
– You’ll be more like a brick;
– And I’ll cut through the smoke.
Brilliant Idea #2
You’re clearly full of insights and ideas as a reader of these Housing Notes. Please share them with me early and often. I appreciate every email I receive, as it helps me craft the following week’s Housing Note.
See you next week!
Jonathan J. Miller, CRE, Member of RAC
President/CEO
Miller Samuel Inc.
Real Estate Appraisers & Consultants
Matrix Blog
@jonathanmiller
Reads, Listens and Visuals I Enjoyed
- The shortage of houses is hitting some people and areas harder than others [CNBC]
- Economist's View: Why the Old Rules May Not Apply Today in CRE [Commercial Search]
- San Francisco, New York Will Have Emptiest Office Space in 2033 [Bloomberg]
- Appeals court affirms Zillow must pay VHT $2M for photos [Inman]
- Are home prices falling? See what it’s like in your area. [Washington Post]
- Zillow, Anywhere and Compass fall off Fortune 500 rankings [Inman]
- The New Housing Landscape [Brooklyn Chamber]
- Related CEO: Class B Office Owners Are Screwed [The Real Deal]
- The Relief: Finding an Apartment. The Remorse: Living In It. [NY Times]
- Compass Financial Reporting Still Contains "Material Weaknesses" [The Real Deal]
- Celebs dodged millions in L.A.’s ‘mansion tax.’ Meet the industry guarding their wealth [LA Times]
My New Content, Research and Mentions
- TINY NYC apartment with NO bathroom sparks furious bidding war [Daily Mail]
- Manhattan Apartment Rents Soar To New Highs As Summer Rush Begins [ZeroHedge]
- Better’s Latest Layoffs Impact In-House Agents [The Real Deal]
- The Agency Franchise Heads for The Hamptons [The Real Deal]
- Bank-busting NYC rents reach a record high — again [NY Post]
- New York City Rents Are Breaking Records—And Are Expected to Keep Growing [Investopedia]
- Manhattan rents up 10% from a year ago [Albany Herald]
- Manhattan apartments are leasing in a flash ahead of summer frenzy [Business Times]
- Rents continue to smash records in Manhattan and Brooklyn [Crain's New York]
- Manhattan Apartments Are Leasing in a Flash Ahead of Summer Frenzy [Bloomberg]
- ‘It’s the opposite of last year’: the Hamptons’ shifting property market [Financial Times]
- Sobrato Organization sells Cupertino strip mall for $93M [The Real Deal]
- Hamptons, North Fork Markets Heat Up [The Real Deal]
- Manhattan, Brooklyn Residential Markets Boom In May [The Real Deal]
Recently Published Elliman Market Reports
- Moving from NY to Miami can save $195K in cost of living, taxes [NY Post]
- Elliman Report: Manhattan, Brooklyn & Queens Rentals 5-2023 [Miller Samuel]
- Elliman Report: Colorado New Signed Contracts 5-2023 [Miller Samuel]
- Elliman Report: California New Signed Contracts 5-2023 [Miller Samuel]
- Elliman Report: Normandy Isles/Normandy Shores New Signed Contracts 5-2023 [Miller Samuel]
- Elliman Report: Florida New Signed Contracts 5-2023 [Miller Samuel]
- Elliman Report: New York New Signed Contracts 5-2023 [Miller Samuel]
- Elliman Report: Florida New Signed Contracts 4-2023 [Miller Samuel]
- Elliman Report: Colorado New Signed Contracts 4-2023 [Miller Samuel]
- Elliman Report: California New Signed Contracts 4-2023 [Miller Samuel]
Appraisal Related Reads
- How Residential Real Estate Appraisers Can Benefit and Help Accountants Do Their Job [Birmingham Appraisal Blog]
- Algorithms, artificial intelligence, and fairness in home appraisals [Consumer Financial Protection Bureau]
- Veteran chief appraiser fully utilizing decades of experience [Valuation Review]
- Chicago Has Second Largest Racial Gap For Home Appraisals In U.S. [The Real Deal]
- That place where pickleball and real estate meet [Sacramento Appraisal Blog]
- Neera Tanden Remarks to Press on PAVE Anniversary [DPC | The White House]
- Kamala Harris Says ‘Inequality Persists’ in Home Appraisals [NY Times]
- The Difference Between Pricing a Property and Appraising It [Cleveland Appraisal Blog]
Extra Curricular Reads
- Q: Why has house price boom faded? A: We're not having enough sex!
- Americans' boating passion still afloat after pandemic
- Heléne Yorke Believes Expiration Dates Are a Myth [Grub Street]
- The Doughnut Wars Are Here [Wired]
- The Messenger is a news startup, but it feels like a blast from the past [CJR]
- Media's "Succession" obsession [Axios]
- Tracking the Smoke From the Canadian Fires [NY Times]
- Ranked: The 20 Most Air-Polluted Cities on Earth [Visual Capitalist]