Matthew Ferrara, Philosopher
 

What You Didn’t Hear (But Need to Know) About Housing in 2012

Bloomberg Surveillance interviewed Jonathan Miller of Miller Samuel, Inc., last week. Too bad it was the Friday before Christmas, because Mr. Miller’s message should have been heard by everyone interested in the housing market.


As practicing contrarians, we’re fans of anyone who bucks conventional wisdom. In fact, the very fact that conventional wisdom is so, conventional, underlies the failures of so many policies that have tried to correct housing downturn. Mistakes like preventing foreclosures rather than letting the market clear, subsidizing house prices with buyer credits rather than letting prices fall to equilibriums. The conventional wisdom got us into this mess – a blind belief that housing prices will only go up – and we remained locked into such square-peg-in-round-hole thinking.

Thankfully, there are people like Jonathan Miller.

We’ve never met him, but we hope to someday, because his December 23 interview with Tom Keene and Ken Pruitt on Bloomberg Surveillance was excellent. Mr. Miller offered both an alternate narrative of the housing market since the crash, and a compelling paradigm for understanding why current policies and research data aren’t helping. He even pointed out how the misreporting of sales volume by the National Association of REALTORS may be contributing to consumer mistrust and analyst confusion in the sector.

Listen to the interview. It’s some of the best 15 minutes you’ll spend planning for the next few years in real estate: Bloomberg Radio: Jonathan Miller

Here’s what you should listen for:

Characterization of the New York marketplace: Mundane. Fall sales not very robust, even though trophy property sales have captured our attention. The S&P downgrade in the summer may have caused mortgage rates to fall, but the uncertainty about overall housing and economic policy coming out of Washington is causing people to wait. Rates aren’t having the anticipated stimulative effect.

On Foreclosures in 2012:  2010 was the year of the short sale; 2011 was supposed to be the year of the foreclosure, but the robo-signing scandal stopped it short. So 2012 will finally be the year of the foreclosure. More foreclosures will keep credit tight, and drive rents higher in many markets. Housing starts are strongest in multifamily properties across the country. Expect at least 3 years of foreclosure activity before we get towards recovery.

On Housing Prices: Nationally, over the next couple of years, expect 5-10% further price drop as increased foreclosures continue to push prices lower, correcting for local market foreclosure inventory.

On Mortgage rates: Historically low mortgages – lower every month – aren’t changing the market. It’s not about interest rates. Low mortgage rates are keeping credit tight. Low interest rates create a low spread for bank earnings. Even with near-free money borrowed from the Fed, the fact that they have signalled they will keep interest rates (and thus spreads/returns) low until 2013 will have the effect of keeping credit tight. It’s about “spreads” not rates to the banks.

On what we can learn from Manhattan real estate: Coops are about 75% of housing stock in Manhattan and, ironically, co-op boards vetted the financials of buyers far better than the lenders did during the boom. It’s a lesson on how to reduce speculation and keep markets more stable (a lesson Manhattan learned from the 1980s).

On the NAR’s re-benchmark of home data: The “big oops.” NAR only captures about 1/3 of actual sales in the market by relying upon MLS data from its members. It then coordinates the data with Census info, to come up with their sales numbers. Effectively, their formula flaws overstated sales activity around 14%, perhaps more, for the last few years. Bottom line: The downturn was far worse than what people read about in the papers. Many people have been suspect of NAR’s research for a while; NAR’s announcements were rosier than reality. It should not be too much of a surprise, since NAR is a trade group trying to help their members make money. Unfortunately, everybody trusts them, when in fact their benchmark is not reliable.

On Case Shiller: The numbers that come out today are technically six months behind the point where there was a meeting of the minds between buyers and sellers. December numbers are really reporting on what happened in August, September consumption decisions. So CS isn’t really what’s going on today.

On Florida: Miami is supposedly the poster child for distressed real estate, but if you parse the market by non-distressed and distressed segments, there are two vastly different markets. Distressed is showing heavy price declines and huge volume, but the non-distressed is showing stability and even upticks in prices, mostly because of of foreign investors.

On Multifamily: Expect double-digit growth rate in rents and multifamily segment, for several years. Rents will remain robust and not a sign of a recovering economy.

 

From our point of view, Mr. Miller is a breath of fresh air. Better, he’s offered smart real estate professionals a number of strategic points to factor into their business plans. Get prepared for three more years of excess inventory in major markets like Arizona, New York, Nevada and Florida, but having a ripple effect across much larger areas. Integrate growth and strength of multifamily and rental sectors into your business plan. Target international investors in key markets. Lobby against subsidizing interest rates further. Promote serious vetting of credit-worthiness to protect both borrowers and lenders.

Most of all, it seems to us that these ideas should encourage real estate professionals from being single-mindedly committed to the “it’s a good time to buy” and “blame the banks” conventional party line. It’s a good time for a lot of things – investing, renting, sensible lending and foreclosing. Mr. Miller is a doing a great job with that message from outside the housing industry. We suggest the message start coming from the inside, as well.

What do you think? Is Mr. Miller on the mark?

 

  • Right on the money. I represent investors in their purchases.

  • Matthew….. ever the contrarian, I believe you are the poster boy for telling people what they need to hear, as opposed to the masses who tell people what they want to hear. We do the same thing, and I hope people respect the fact that we call ’em as we see ’em, and not po-poo us as being “negative”.

  • Gina:
    Yes – and everyone is really an investor in the transaction: The bank/lender, the buyer, and even the real estate agent, who has a vested interest in selling the property at the right price, to maintain market price stability.
    Thanks for your comment!

    — Matthew

  • Thanks, Bill:
    One of the greatest challenges in any “conversation” is to move beyond the talk-tracks and look at the problem in many ways. Too many people are so concerned with being “correct” that they don’t focus on being “right” and that’s a big difference. I’ve tried to keep telling it like it is for over 20 years. Sometimes because so few of us (like you) do; and so many others repeat things that are neither right or correct.
    Thanks for stopping by and your ongoing support!

    — Matthew

  • Diannaackerman

    Lots to take in..I love your comment on “so busy trying to be correct, that we don’t do the “right” thing.” 

  • Thanks, Dianna. I appreciate your comment.

  • Debbie Moore

    Time to get our heads out of the sand!

  • Anne Webster

    Thanks for bringing this interview to our attention!  One that shouldn’t have been missed. We are grateful for your insight and wisdom!  We need to hear & read & speak the truth even if it’s not what we want.  The only way to recovery is to determine viable strategies for recovery rather than the party line “rates are low so buy now”.  Thanks Matt for always being on the ball!

  • Agreed!

    The good news is: With this kind of thinking, the actions we need to take are clear and specific. We can finally start doing some good to help change the market!

  • My pleasure, Anne!

    From my perspective, if we can get ourselves to focus on the reality, not the “marketing spin”, of what’s happening, we’ll not only do better for ourselves, but for our clients, the market, and the economy as a whole. It’s time for real estate professionals to think of more than just “the next deal”!
    We can do it!

  • This reminds me of the old Firesign Theater album (Yes. It was 1974. So it was an album.) – “Everything You Know Is Wrong!”

    Contrarian, outside-the-box or whatever you want to call it. This is really using some stats, local in nature, to extrapolate national trends. 

    A lot of it sounds intuitively right – banks like “spreads” not “rates”, the foreclosure wave is still coming and, the granddaddy of them all, mortgage money will continue to be tight (small spreads) thus people won’t be able to get mortgages to buy homes combined with the new homeless (foreclosures) and they’ll become renters driving rental pricing and the need for multi-family housing (i.e., apartment buildings).  

    It really is like the ’70s all over again. High down payment requirements, platinum credit, money in the bank.

    It’s sad about NAR. You would think they would want high credibility but obviously they’re so busy trying to paint a rosy picture that good methodology goes out the window. Easier to raise dues and payoff politicians, I guess.

    Here’s a stat that some optimists use to argue the other side: “echo boomers” – people between 35 and 39 –  are in their peak income producing years and getting a little too old to live with Mom and Dad. They’re thinking about starting a family and … wait for it … buying a house. These folks are in the here and now and their numbers are large. As a result, first time buyers will start coming into the market enticed by low mortgage rates and low home prices.

    Personally, I tend to agree with the pessimists that talk about a housing recovery still about four years out. It’s killing me.

  • Michael J Gonzalez

    Matt, thanks for sending this out. I have been personally taking the stand lately in our business planning that the “things will get better next year” thinking is not where we should be focusing. While I’ve probably gone a little too far over to the “Aftershock” way of thinking, it’s definitely better to plan for the worst and hope for the best!

  • Ken:
    Love the 1970s reference; not because I remember it personally (BIG GRIN) but because I subscribe to the view that if you don’t learn from history, you’re doomed to repeat it!
    I do think there’s some pent-up demand amongst 30-39 year olds; and they are also amongst the most mobile, many still single, no kids, so they can move to states with booming economies (JOBS!) and buy houses. Definitely good – EXCEPT that the number of these people is relatively small compared to the Baby Boomers who are stuck, and the Gen Y’ers (between 20-29) who are perfectly happy to live in the parents’ cellar for another few years… or more! Household formation is definitely at the lowest in decades, so I think there’s a big “gap” coming in replacement buyer population. Maybe for 5-8 years.

  • Michael:

    I agree; we need to plan to be successful for the PRESENT; which means understanding the current market forces, and choosing strategies that can put deals together within the existing situations, not “possible” ones we might guess wrong and may never come about. Good thinking!
    Thanks for your comments!

  • Very good!  I haven’t read or heard anyone talking about if we would let interest rates rise that credit would loosen up.  The lower the rate (less return), the less risk an investor will accept.

  • Brad:
    Exactly! It’s not “worth the return” for a bank to lend and only earn a small spread, especially on real estate, which is still chaotic, falling or uncertain. That’s why they only want the BEST risks – most credit-worthy borrowers – and thus are “tight” on lending. We have to teach the industry and consumers that unless everyone can get a “good deal” – borrowers getting a rate they can afford, but lenders making a sufficient profit on their loans – that the banks can simply move their lending activities to other, higher margin sectors like technology, healthcare, etc…
    Thanks for your comment!

  • John Burke

    Great blog Matt. I am in agreement that this is a great depiction of the present and future situation in real estate

  • Anonymous

    Matthew–re: the following paragraph–

    “On the NAR’s re-benchmark of home data: The “big oops.” NAR only captures about 1/3 of actual sales in the market by relying upon MLS data from its members. It then coordinates the data with Census info, to come up with their sales numbers. Effectively, their formula flaws overstated sales activity around 14%, perhaps more, for the last few years. Bottom line: The downturn was far worse than what people read about in the papers. Many people have been suspect of NAR’s research for a while; NAR’s announcements were rosier than reality. It should not be too much of a surprise, since NAR is a trade group trying to help their members make money. Unfortunately, everybody trusts them, when in fact their benchmark is not reliable. ”

    If NARs method is flawed (which appears to be undisputed); is it possible that they over stated during the peak times too? Unless they changed the method since 20087/2008 the overstatement is consistently overstated. If that’s the case, the difference is not over stated. Just all of the figures.

    You are 110% right about reliablity. When the numbers are wrong and corrections have to be made, confidence in the source comes into question.

     

  • Anonymous

    Matthew–re: the following paragraph–

    “On the NAR’s re-benchmark of home data: The “big oops.” NAR only captures about 1/3 of actual sales in the market by relying upon MLS data from its members. It then coordinates the data with Census info, to come up with their sales numbers. Effectively, their formula flaws overstated sales activity around 14%, perhaps more, for the last few years. Bottom line: The downturn was far worse than what people read about in the papers. Many people have been suspect of NAR’s research for a while; NAR’s announcements were rosier than reality. It should not be too much of a surprise, since NAR is a trade group trying to help their members make money. Unfortunately, everybody trusts them, when in fact their benchmark is not reliable. ”

    If NARs method is flawed (which appears to be undisputed); is it possible that they over stated during the peak times too? Unless they changed the method since 20087/2008 the overstatement is consistently overstated. If that’s the case, the difference is not over stated. Just all of the figures.

    You are 110% right about reliablity. When the numbers are wrong and corrections have to be made, confidence in the source comes into question.

  • Dava:
    That’s entirely possible! Which leads to the following conclusion: NAR has been wrong all along! Incorrect on the way up (perhaps creating hysteria that wasn’t accounted for?) and incorrect on the way down (perhaps misleading sellers as to just how bad the market really was, and their need to be even more realistic?).

    I’m reminded of the old saying: Two wrongs don’t make a right. If anything, the possibility you raise means we should be even more concerned….

    As always, thanks for your comments!
    – MF

  • Guest

    I’m concerned that you are broadcasting this brief, hot-point, incomplete interview as a  2012 preview. Maybe a partial review of New York and Miami, but geez, that was rough.

    On several poorly made points in the interview: if rents are going up, that will help the housing market (regardless of what the economy is doing).  Higher rents mean more people will move to purchase a unit at a lower monthly cost than renting a substitute property. “Principle of Substitution” in Appraisal 101. There are some serious misappropriations in this interview and also some false correlation = causation arguments.  Maybe the interviewee wasn’t given time to fully vet his thoughts, but the veracity of comments on interest rate spreads, housing price predictions, foreclosures affect and more is concerning.  
    Most egregiously, His attributing the distressed an non-distressed market divergence solely to foreign investors is a mistake. I understand they were talking specifically about the Miami market, but this interview segment was misleading at best. The distressed vs. non-distressed price trend divergence is happening all over the country.  The common home purchaser is wary of risk and does not want to take on foreclosure properties “as-is” no matter how far below market they get because there are mold and water damage issues, other deferred maintenance ( which means out-of-pocket costs are involved and people are short on cash, as we know), not to mention the “unknown” damage and stigmatized status of these properties. Plus the difficult, time consuming, nerve-wracking process a purchaser has to go through when dealing with banks.  Foreclosures are increasingly becoming an “experienced investors only” situation, especially considering the slow-down of bringing the properties to market which is causing an uptrend toward increased state of disrepair.  Short-sales prices are decreasing for many of the same reasons, but also because of the extended transaction cycle (in contract to bank-owned stock which can close quickly).  If buyers are hesitant to purchase a home in a normal transaction, the motivation is certainly decreased significantly by the process of having to wait 6 months to close. Less demand = lower price.
    Anyway – I’m out of time, but please put some more critical thought into what the “experts” are saying before backing their statements.  I haven’t read many of your posts, so perhaps I’m not up to speed on your views of the market, but this was a disappointing post and interview.  

  • Dear Jason:

    I appreciate your comments. You probably won’t be surprised that I don’t agree with them, but maybe there are some points of discussion.

    FIrst, I think you’re making a fundamental mistake thinking that higher rents will benefit housing sales. That’s what the “classic” housing model would say, but we’re no longer in such a model. Rising rentals are the *result* of buyer’s *inability* to purchase houses or pay for the ones they are in (foreclosures). In other words, rising rents are an *effect* of poor housing sales, for whatever reason (Mr Miller – and I – would argue it’s due to credit inaccessibility). I would add that it’s also due to preference; the twenty-somethings are far different than their parents, and purchasing a home isn’t a priority (as we’ve blogged about many times) during their 20s and even 30s. They remain unmarried and without kids, so the “traditional” reasons for buying don’t apply – not even to protect against inflation or as some sort of long-term investment, because 20- and 30-something aren’t staying in their homes for 20 years like Boomers did…. But put all that aside and there’s no evidence that rising rents will improve home purchases, because home affordability has been a all-time highs for a few years, and rents have risen nonetheless.

    Second, I think Mr Miller was making the point that in Miami, the foreign buyer is keeping the non-distressed, non-foreclosure market healthy. I don’t think he was misleading *at all* but we all hear things differently. But, having read your comments a few times, I really can’t say I understand what you’re trying to say about that part of the interview. I’d agree that foreclosures are increasingly becoming the option for experienced investors, less so than for ordinary buyers; but if anything, that means that the inventory will stay on the market even longer – depressing house prices further and for years in many neighborhoods until enough investors absorb them – which is exactly what Mr Miller said when he predicted another price drop for 2012 and increasing rentals (because non-distressed homes will uptick in places like Miami, leaving only rentals for “ordinary” buyers).

    Thanks for stopping by; I appreciate you taking the time to comment, even if we disagree. I hope you take a moment to explore some of the other posts we have, too.

    – M