Affordability and Responsible Borrowing

posted on March 2nd, 2009 filed under: Real Estate News

Neither a borrower nor a lender be.

The National Association of Home Builders and Wells Fargo maintain a Housing Opportunity Index that ranks 222 metro areas for affordability based on a comparison of median price to median income.  The data go back to the 1990s, before the boom.

The median price in Miami back then was $100,000, and the median income was about $40,000 — a ratio of about 2.5.  At the peak, the median price had risen to about $300,000, while the median income had risen to about $50,000 — a ratio of 6.  If the ratio now is between 4 and 5, that leaves another 30% to 50% before a return to the pre-boom ratio.

Similar problems characterize the New York metro market.  The NAHB/WF HOI data show that the New York metro now ranks as the least affordable in the nation: 222 of 222.  The median price of $500,000 is a gravity-defying 8 times the median income of $63,000.  Pre-boom, median the ratio was about 3.5, based on a median price of $170,000 and a median income of $47,000.  A return to the pre-boom ratio would require a 55% drop in prices.

Yes, rising median incomes may blunt the extent to which prices actually decline.  But just as price gains moved so much faster than incomes to the upside, price declines will be the prime mover to the downside as well.

See for yourself (MS Excel required):

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House Price Index Update — Miami and New York

posted on February 10th, 2009 filed under: Real Estate News

A real estate downturn is a process, not an event.  As noted previously in this blog, significant downturns in real estate prices have taken three to four years from the time prices start falling to the point that they reverse up from their ultimate trough.  And that is based on modern experience.  If this period is more like the Great Depression, the modern experience might be too soft a comparison.

Anyway, we are only a year or so into the price declines in New York, and about two years in Miami.  There remains much work to be done on the downside.  As Jeff Saut of Raymond James likes to say: "Sometimes me sits and thinks, sometimes me just sits."

Today's postcard from Miami:


And from New York:


One note to tuck away in the back of your mind: Real estate price indices are terribly lagging indicators.  It takes a long time to collect and report the data, and the OFHEO series on which these charts are based is especially slow.  As a result, these charts will show a reversal only well after it has happened — probably several quarters late.  But we're nowhere near that stage of the process.

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Distant Early Warning

posted on October 18th, 2008 filed under: Real Estate News

The U.S. has enjoyed decreasing borrowing costs for 25 years, ever since the Fed under Paul Volcker slayed the inflation dragon.  Inflation worries were stoked in the past year as oil and commodities spiked, and Volcker himself emerged to warn that the Fed was behind the curve.  Now he doesn't look so clairvoyant, as oil and commodity prices have collapsed and fears have swung from inflation to a deflationary Second Great Depression.

As the Fed and Treasury have waged all-out war against the financial crisis over the past month, yields on long-dated Treasuries have risen significantly.  Just a fluctuation, perhaps.  But a couple of the investment world's most well-known voices recently sounded a warning about the health of the 25-year-old bond bull.  Jim Rogers declared U.S. bonds to be the last bubble yet to pop.  And Julian Robertson said his favorite trade right now is a "curve steepener" — a bet that long-bond yields will rise while short-term yields stay low.

The possibility of a bond bear — falling prices and rising yields – might strike fear into the hearts of equity investors.  The higher the yield on guranteed government debt, the harder it is for stocks to compete for investors' dollars.  Falling prices and rising yields fed the great bear of the late '60s to early '80s, while rising prices and falling yields fed the great bull of the '80s and '90s.

Is a great bear for bonds ahead?  Are we headed for that '70s show?  Let's compare.

In the '70s, inflation clearly broke out to the upside.  This time it has not, at least by official measures.  (It is possible that the books are cooked, see



Fed policy reflects the eternal inflation-recession cycle.  They raise rates to ward off inflation, then lower rates to deal with the resulting recession.  On this score, the current pattern resembles the mid-'70s.



And what about the longer-term rates that Rogers and Robertson expect to rise?  The 10-year yield (for which data go back furthest) rose from the early '70s right through the devastating 1974 recession, and did not relent until well after inflation turned down.  Even then, yields made a tellingly higher low before climbing again toward their dizzying peak in the early '80s as inflation returned with a vengeance.

At present, there is absolutely no sign of that pattern.  To the contrary, yields remain extraordinarily low.



Keep in mind that the pattern of higher lows in the '70s was part of a much longer trend, stretching from the early '50s to the early '80s, as shown below.  We're way down the back face of that mountain, and it's hard to imagine yields can go much lower than they have already gone.  But have we reached an inflection point?


Whether Rogers and Robertson are right will require more evidence than we have so far.  At a minimum, a few significant higher highs and higher lows need to be established.

Even if that happens, it is an open question whether the stock market will face serious headwinds.  The stock market did very well, thank you, during the '50s and much of the '60s – the first half of the last secular rise in yields.

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Rent, Don’t Buy? Still?!?

posted on October 18th, 2008 filed under: Real Estate News

Yep.  Hard to believe, but in some of the real estate markets that have declined the most, it is still much cheaper to rent than to buy.  From the New York Times:

In Miami . . . home prices are about 22 times annual rents, according to an analysis by Moody's  The average figure for the last 20 years is just 15 times annual rents.  The difference between those two numbers suggests that a home valued at $500,000 today might be worth only $341,000 based on the long-term relationship between prices and rents.

The Times story jibes with my own research on the Miami real estate market.  In 2007, I analyzed a sample of Coral Gables real estate listings in the Miami Herald going back to about 1980.  It wasn't hard to find comparable houses in the sale and rental listings, and as usual, some properties were listed both for sale and for rent.  My conclusion was that during the 1980s and 1990s, real estate prices in Coral Gables were about 12 to 14 times annual rent.  For the last few years, that ratio has been about 20 times.

My sense is that a vanishingly small number of real estate agents think in these terms, much less do the research.

Worse, real estate agents have a big disincentive to advising customers to consider renting.  The commission on a sale is about 10 times the commission on a rental.  An agent will typically get about 2% of a sale price, compared with about 3.5% of annual rent.  With prices at 20 times rent, a home in Miami or Coral Gables that would cost $1 million to buy would cost $50,000 to rent.  The commission on a sale would be about $20,000, while the commission on a rental would be less than $2,000.

The saddest thing is that in a falling market, buyers lose vastly more than agents gain.  In a market that falls 10%, an agent who sells $10 million in property makes $200,000 in commissions, while customers collectively lose $1 million in equity.  (And the market in Miami and Coral Gables has fallen a lot more than 10%.)

Does your real estate professional put honest, capable advice above personal financial gain?

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House Price Index Update — New York and Miami

posted on September 4th, 2008 filed under: Real Estate News

Another calendar quarter, another batch of data.  Here are updated charts incorporating the most recent release of the House Price Index (HPI) maintained by the Office of Federal Housing Enterprise Oversight (OFHEO).

In the New York metro area, prices have moved sideways for a couple of years now.  This is consistent with the operative thesis here, i.e., that prices in New York will be roughly flat at best for about five to seven years beginning in 2005, with greater risk to the downside than to the upside.


In the Miami metro area, prices remain in decline and are still far above their long-term trendline.  This, too, is consistent with the operative thesis here, i.e., that prices in Miami will fall 30% to 50% over a period of three to four years, and not return to their old highs until more than a decade has passed.


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Still Skating in New York

posted on August 23rd, 2008 filed under: Real Estate News

One of the remarkable things about the housing bust is that real estate is doing fine in the nerve center of madcap finance: New York.  Take, for example, the price action in several local markets in southern Westchester County.  These are close-in suburbs of New York City.  As the chart below demonstrates, these bedroom communities to the world’s financial capital appear to be skating along without experiencing the devaluation that has enveloped so many other places.

One possible explanation is that dollar devaluation attracted foreign investment in Manhattan real estate, thus propping up the buying power of young couples who often sell Manhattan apartments and move to Westchester after starting a family.  It’s worth noting that the Manhattan market may have rough sledding ahead.  Fund manager Ken Heebner called a top in Manhattan real estate about a year ago.  If he proves right, that could pressure the Westchester market.  On the other hand, in the early ’90s, when Manhattan fell by 25% to 50%, Westchester basically went sideways, with only minor dips.

The chart shows median prices per square foot from 2000 to 2008 in Larchmont, Bronxville, the Bronxville P.O. area of Yonkers, and Edgemont.  Please note the data ranges in price and elementary schools.  Keep in mind that the data for 2008 represent a partial year, until August.  Somewhat lower prices per square foot are often registered toward the end of the year, so the final ’08 numbers are likely to be a bit lower.

This is not a recommendation to buy in these areas, just an observation that prices have not fallen in the NY ‘burbs the way prices have fallen elsewhere.


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Miami — Now with Mountains!

posted on August 11th, 2008 filed under: Real Estate News

Of homes for sale, that is.

Seriously, though, there’s a question about what the inventory numbers are telling us right now.  The charts below show the months’ supply of homes for sale in Miami, Coral Gables and Pinecrest.

Months’ supply means the number of homes on the market in a given month divided by the number of homes sold that month.  The result is the number of months it would take to sell all the homes on the market if the pace kept up and there were no new listings.  Of course, the pace changes and there are new listings, so the number never goes to zero.  But this is one of the most objective and important measures of market conditions.

The perenial pattern is that supply rises at the beginning of the year with new listings, and recedes into the summer as deals from the spring market close.  So we should expect seasonal fluctuation.  In a normal market, the pattern would be a cycle within a sideways channel.  In a weakening market, the pattern is a cycle within a rising channel.  In a strengthening market, the pattern is a cycle within a downward channel.

As you look at the charts, keep in mind that the direction of months’ supply does not dictate the direction of prices, at least in the short term.  A balanced market is generally regarded as about 6 to 8 months’ supply.  Anything more is considered a buyer’s market characterized by downward pressure on prices.  Anything less is considered a seller’s market characterized by upward pressure on prices.

The data below therefore suggest continued downward pressure on prices.  But a turn in the trend is a necessary precondition to recovery, so it bears watching.

Here’s the chart for Miami.  Is it receding after a peak, or is it just making another higher low within a still-rising channel?


Below are charts for Coral Gables and Pinecrest.  Are they leveled off and ready to decline?  Or are they headed higher again?





It might be tempting to see the recent declines in months’ supply as an indication that the market has turned the corner toward recovery.  But the recent data are from the spring-summer period when the months’ supply should be falling anyway.  Beware wishful thinking.

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Math Problem

posted on August 2nd, 2008 filed under: Real Estate News

Anyone remember the old conservative lending formula that says a person’s home payments (including principal, interest, taxes and insurance, also known as PITI) should be no more than 28% of their gross income?  What would happen if we went back to those tried and true lending standards?  It’s a question worth asking, because we just might be headed that way.

Here’s the answer: A person’s loan should be no more than about three times their gross income.  That’s a scary concept, because most people have been borrowing way more than that, and a return to old standards could mean continued downward pressure on home prices.

The math is plain.  The old standard says .28 x gross income = PITI.  With interest rates a bit over 6%, the P&I portion is about 7% (gotta pay principal).  Taxes are usually 1% to 2%, and insurance is generally less than 1%.  Figure that T&I add up to another 2%.  Therefore, total payments = 7% + 2% = 9% of the amount borrowed.  Plugging that into the old formula: .28 x gross income = .09 x amount borrowed.  In other words,

.28 / .09 = amount borrowed / gross income = approximately 3.

Consider what that means for places like the Miami suburbs of Coral Gables and Pinecrest, or many of the suburbs around New York City, like Westchester County.  The median home price in all these communities is still about $600,000, and the median household income ranges from about $70,000 to $100,000.  Traditional lending standards would say that the median household should borrow no more than about $210k to $300k.

Where would the other $300k to $390k come from to pay for a $600k home?  Savings?  In a country where the savings rate is near zero?  Think about it: A household with income of $100k would have to save 10% of that income for 30 years to come up with $300k.  (Yes I know, savings appreciate, but over a 30-year period, house prices appreciate too.)

It’s really been a sort of Ponzi scheme in which prices continued rising faster than incomes as long as people were willing to borrow more aggressively.  Inevitably, the time was reached when a greater fool could not be found, and the scheme exhausted itself.  Mr. Ponzi, meet Mr. Minsky.

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Virtual Office Websites: VOW Now?

posted on July 13th, 2008 filed under: Real Estate News

The U.S. Department of Justice ("DOJ") recently settled an antitrust lawsuit against the National Association of Realtors ("NAR") over limitations that NAR placed on a new way of doing business called "virtual office website", or VOW.

VOWs primarily concern how buyers can shop.  Ever go on a brokerage website — or NAR’s site — and search for property?  The information is very useful, but somewhat basic (what’s for sale, price, pictures, square footage, etc.).  It derives from the multiple listing service ("MLS"), which contains far more detail.  VOW brokers proposed to give customers access to the full MLS in exchange for users’ agreeing to become customers of the VOW broker.

NAR seemed to view this as a threat.  Perhaps they saw it as a further erosion of Realtors’ relevance.  Once upon a time, buyers who wanted listing information had to visit an office and establish a personal relationship with a Realtor.  Listings were printed in giant paperback volumes that looked like phone books.  Not fancy, but only Realtors had it.  The display of listing information on the internet changed that, but the information remained sufficiently basic that a buyer wanting more information could get it only from an old-fashioned consultation with a Realtor who had MLS access.

The most critical information — and arguably what the VOW dispute was really all about — is historical sales data.  The prices at which properties sold in the past — especially the recent past — are critical to understanding current property values.  The settlement allows MLSs to block VOWs from displaying sold data (as well as pendings, expireds and withdrawns), but only if all other avenues of disclosing that information are blocked as well.  Hard to imagine an MLS could feasibly bar all agents from disclosing that information to their customers in person, by telephone, by e-mail or by snail mail.  (NAR previously took the position that a formal market analysis could include such information even if an informal converstaion couldn’t, but still, stopping all agents from loosely divulging such facts seems like a pipe dream.)

Whether VOWs change the future of real estate brokerage is open to doubt.  To the extent VOWs open up the full MLS to the internet, buyers may become less dependent on Realtors at the start of the buying process.  But internet users are loathe to provide personal information and sign contracts just to get information.  Remember the internet’s mantra: "Information wants to be free."  So VOWs may fall flat as a model for attracting business.

And VOWs can only change how buyers shop, not how they buy.  A buyer will still need a Realtor to visit properties.  Rather than commit to some faceless VOW broker just to get some additional MLS data, buyers may choose their agent first and worry about getting every last drop of information later.

Yet changes like this sometimes lead in directions not initially anticipated.  VOWs may become the industry standard not because online brokers become dominant, but because competition spurs traditional brokers to provide the best information and service.  In the future, maybe all brokers’ customers will be routinely provided with VOW access passwords.  And eventually, perhaps the whole idea of password access will be dropped, and Realtors’ historically possessive attitude toward MLS information will have been completely eviscerated.

Note to traditional brokers: If you implement VOWs, you will need to decide how to allocate business that originates from them.  A customer who starts at the website will need assistance at some point from a live agent.  In the virtual world, who’s on "floor time"?

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Coral Gables Real Estate: (Some) Prices Falling

posted on July 7th, 2008 filed under: Real Estate News

Forecasting the real-estate decline has been easy.  The Federal Reserve’s cheap-money policy turbocharged a pre-existing bull market in real estate, causing severe imbalances between prices and incomes, prices and rents, and good old supply and demand.  It had to end badly, and it did.

But there has been remarkably little effect on prices at the high end.  Consider Coral Gables, Florida.  There is a wide range of properties in the Gables, from 1,500 square-foot bungalows near low-income Miami neighborhoods, to 10,000 square-foot mansions on the bay.

Prices have declined overall, but the lower end of the market is entirely responsible for the decline.  Check out these charts showing the average price per square foot of single-family homes in Coral Gables.  Each chart corresponds to a different price range.

$0 to $499,999:


$500,000 to $999,999:


$1 Million to $1,999,999:


$2 Million to $4,999,999:


$5 Million or More:


The declines are most noticeable in the $500k to $1M range.  Perhaps that should come as no surprise, as the median home price is about $650k.  Typical buyers in this range are probably stretching to buy a decent house on a moderate income, primarily with borrowed money.

The high end, by contrast, shows no discernable downtrend.  High-end buyers are less likely to depend on the availability and easiness of credit (see the post on cash deals), and may be less likely to fall victim to circumstances that force a sale.

It seems that wealth brings security.  Quelle surprise!

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