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?