NAR’s Existing Home Sales numbers continue to edge higher. In this chart I annualize the non-seasonally adjusted and seasonally adjusted results. Think there isn’t seasonality in housing sales?

Here’s a good summary by Peter Coy at Bloomberg Businessweek.

No doubt a big reason was the improvement in affordability. The interest rate on a 30-year fixed-rate mortgage has continued falling since the period covered by the NAR report, portending better times ahead. Freddie Mac (FMCC), the mortgage-buying giant, says the rate was 3.79 percent in the week ended May 17, the lowest since it began keeping records in 1971. The Realtors’s index of affordability hit a record high in the January-March quarter. It factors in sales prices of existing homes, mortgage rates, and household income, which is slowly strengthening as the labor market improves.

And here’s a trend on inventory and absorption (months supply). Inventory continues to slide (not seasonally adjusted).

• Existing Home Sales Rise—Affordability Helps [BloombergBusinessweek]
• Existing Home Sales [NAR]

Every so often, a Matrix reader submits something they feel very strongly about it and bravely enter the Vortex where I post it.

Guest Columnist: Cecil Simon

Cecil has been a New York general state certified appraiser since 1992. He takes a look at the intersection of professional education and licensing. He’s weighed in here before. Like me, Cecil was an appraiser before the licensing law in 1989 and in fact wrote Congress about this matter as early as 1986.

Admittedly this is super appraiser wonkiness, but it’s worth the read.

-Jonathan Miller

May 12, 2012

Did we get there? the promise of Licensing Appraisers.

How technically prepared are Certified General Appraisers? A recent editorial by Henry H. Harrison in his Real Estate Valuation Magazine, suggested the answer is not very well. In fact, Mr. Harrison even challenged readers to provide evidence that Certified General Appraisers did not make at least 80% of their living writing residential work.

I believe he is correct on the preparation issue, and incorrect on what Certified General Appraisers do in the industry. Most Certified General Appraisers have now become the workhorses for fee shops run by designated appraisers, working as independent contractors at low rates and without benefits. This was by design, and the education and experience requirements set by the Appraisal Qualifications Board in the early 1990s, later amended in 2008, bears me out.

It is now generally accepted that the requirements for General Certification set in 1991 were deplorable, although Harrison and other in his group did not think so when I first wrote to him in 1993. The 2008 fix with the addition of a course in Highest and Best Use and Market Analysis, and one in Report Writing was a plus, but the remaining content was just a split of two former lower level courses into some 120-140 hours. The final product was three hundred classroom hours, more than were required for the MAI in 1990, yet these were junior courses.

FIRREA had a specific mandate. That mandate required that the education and experience required for General Certification be such, that a person with those qualifications would be able to appraise any property without regard to value in a Federal related transaction. That is a high standard, which was well known to the Chairman and members of the Board from 1991 to 2004, yet they did otherwise. The reasons often given in support of the lower standards were the use of the term minimal education required, that States could add to the basic core, and that Certification requirements were intended as a beginning. But the mandate certainly does not imply that.

Basic appraisal education requires only six courses, seven if you add the new Quantitative Analysis course, which is a plus. The seven courses are Appraisal Principles and Procedures, Highest and Best Use and Market Analysis, Land Valuation and the Cost Approach, Direct Sales Comparison Approach, Income Approach, Quantitative Analysis, and Case Study and Report Writing. These names can be applied to Residential and General [Vortex] Did we get there? the promise of Licensing Appraisers.

Certification courses with different content, and all that is currently listed by the Appraisal Institute as Level 1 and 2 and required for their MAI designation can be covered in those seven courses. Hours can be assigned based on the content to be covered.

The seven basic courses plus four years of experience, and the State Exam, is more than adequate to lay the groundwork for Certification as well as any designation. It should be noted that the six courses used prior to 1990 for the MAI, and the four used for the SREA (101, 102, 201, 202), were all taught in less than three hundred hours. These courses produced some of the best educators and practitioners currently working in the industry, including Mr. Harrison. Even Universities that grant Undergraduate and Graduate Degrees in Real Estate offer only one or two courses in Valuation.

I took the trouble to review the education requirements for all of the original members of the Foundation that deal specifically with Real Property interest. The Appraisal Institute of Canada arguably has the best program, and the Appraisal Institute is the only one with Advanced Courses. Some startling facts also come to mind. The education requirements for the MAI designation have increased from 267 hours in 1990 to 482 in 2008, an increase of 215 hours, all without any change in the theory and methodology of valuing real property. The only industry change during that period was the use of software that makes database searches and data analysis easier. In fact, one group, The American Society of Appraisers could not even remember when they last hosted a basic course.

I believe that The Appraisal Institute is the best professional association representing appraisers and the leader in the industry, but its continued creation of advanced courses in order to create the illusion that its members and candidates are better prepared than Certified Appraisers is a farce. The same seven courses could easily serve as the core education requirements for candidates as well as General Certification. Additional requirements for designations can be added. The MAI designation is a highly recognized brand, and could be granted based on work experience and peer review. Downgrading the education requirements for Certification is a dumb idea, and it is clear that The Appraisal Subcommittee fell down on its mandate to monitor and review the practices and activities of the Foundation.

There are a few good textbooks out there on Appraising Real Property, and I place The Appraisal of Real Estate, published by the Appraisal Institute at the top of that heap. Now I would hope that any State that puts its imprimatur on the qualifications of any individual to call that person a Certified General Appraiser, expects that they have covered the content of that text from cover to cover. That was the intent of FIRREA. But it appears that by separating the content into General and Advanced sections, both the Appraisal Institute and the Appraisal Qualifications Board that it has controlled since 1989 seems not to think so. This difference in education is the centerpiece of Harrison’s thesis.

The Qualifications Board should simply set the education requirement as successful completion of a course in the seven areas and forget hours, and if a rigorous State exam is made part of the process, then The Appraisal Institute will be sure to include much of what it now calls advanced content in those seven courses.

On the issue of college education, professional associations may find this a plus, and hopefully the appraiser has written enough college papers to be able to write properly, but degrees in most disciplines will not make you a better market analyst.

The answer to my original question is yes and no. We now have a mechanism to punish bad apples, although better enforcement is needed, but the standards for education, experience and testing did not.

C M. Simon.

And more importantly, take notice of my twitter shout-out . Fun!

[click to expand]

Sort of like the sparklines feature in Excel – It provides a quick snapshot of where we are economically right now.

A good friend of mine, Mark Stockton of Valuations Unlimited, LLC, has developed a powerful research tool to aid in valuation. Mark is a sharp unassuming guy who has sold technology to Wall Street before. Here is a simple overview. It addresses the significant elements of the technology. It’s not an AVM and better yet…it actually works! At least it worked when I tested it on my house in CT (a 200 year old 3 story Salt Box) and on a number of my friends’ and relatives’ properties in various parts of the US.

His technology develops the replacement cost, market analysis, land residual analysis, assessment analysis, sale price index and rental analysis and allows the user to weight the applicability of each approach.

He’s got several very interested parties at this point. As Mark has told me: “We certainly need to make decision makers aware that there is at least one solution available that can help them make better decisions and monitor their investments over time.”

Here’s something he just wrote for my blog. It’s about a different kind of “sustainability”. A good read.

Sustainability of Property Values
By Mark L. Stockton
May 16, 2012

There has been a lot of discussion in recent months about the need to reengineer the appraisal process. There is no denying the fact that the process as it currently exists is antiquated and inadequate. Methodology is purely subjective; there is a lack of adequate analytics.

These deficiencies can be corrected. Comprehensive analytics are available to those who would demand them. Much of the subjectivity can be replaced by objective processes that will support reasonable value conclusions. However, fixing the means by which value conclusions are developed addresses only part of the problem. Those conclusions must be examined for sustainability in order to be used to make prudent lending and investing decisions.

A friend recently lost her home. She purchased it new in May of 2002 for $234,500, and at the time the price was reasonable when compared to the other 1,000+ newly constructed homes in the immediate area. I have not seen the appraisal that was done at purchase, but I imagine the value conclusion was reasonable in light of the fact that there were so many similar homes in the subdivision that were selling at the same time. There is little doubt that the appraised value was extremely close to the contract price of $234,500.

I cannot deny that the appraised value of the property in May of 2002 was – and should have been – approximately $234,500. What I can say with authority is that the appraised value at the time of purchase was unsustainable.

There are meaningful relationships in real estate markets just as there are in other markets (stocks, commodities, etc.) that must be monitored to support prudent lending and investing decisions. For example, we know there is a relationship between rents and sale prices that should be considered. From a lender’s perspective, if a buyer should have difficulty paying the mortgage, it would be comforting to know the home would bring in enough income in the form of rents to pay its own way.

There is another important relationship that has been long overlooked, and that helps us understand the sustainability of property values. It is the relationship between the market value of a home and its depreciated replacement cost (RCNLD). There is an old (often forgotten) adage that no prudent buyer would pay substantially more for a home than the cost to rebuild it on a similar site. This concept was once recognized by the appraisal industry and acknowledged in the cost approach to value. There was a time, not long ago, when appraisers had to provide commentary to support any cost approach in which the site value represented an excessive portion of the overall value. It was recognized at the time that a large disparity between the value of the improvements (depreciated replacement value) and the value conclusion (the market estimate derived from the cost approach) could be indicative of an unsustainable market value. History has, in fact, shown us that when the gap between RCNLD and sale price in traditional housing markets grows beyond 120%, market values are approaching unsustainable levels. When that ratio reaches 130%, we can be certain that a correction in home prices is imminent.

When my friend purchased her house in 2002, the ratio between RCNLD and home prices (Market Experience Ratio©, or MER©) in the immediate area was 135%. Her home and the neighboring homes were being built and sold at the high point of what would become known as the housing bubble. For those of us who watch relationships closely and have developed a means of monitoring them on both a broad scale and granular basis, this was obvious. Each time this occurs, as it has on several occasions in the past 30 years, market prices respond by declining to a level that more closely approximates depreciated replacement cost. The current MER for homes in the area of my friend’s house is 106%. The ratio is still declining slowly, but prices have reached reasonably sustainable levels.

Here’s the bad news. My friend was able to secure a 100% loan in 2002, with payments structured to start off small and increase over time as her income and her equity grew. Ecstatic at the prospect of being able to own a brand new home with no down payment, she was unaware of danger that lay ahead. So too was her lender, apparently. She can be forgiven; she was not, and is not, what is sometimes referred to as a “sophisticated investor”. How can an average consumer be expected to understand market dynamics and complex financial dealings? Isn’t that why they rely on professionals?

The lender, however, should have known better. What happened to real estate markets nationwide a few years thereafter was not an anomaly. It has happened often in the past, and it will happen again in the future. Every time investment dollars become more abundant and credit restrictions relax, you can bet this same scenario will play out in real estate markets across the country.

About a year ago, my friend lost her job. She was forced to confront the fact that she was unemployed and would have to compete with tens of thousands of other unemployed individuals for a position that would probably pay less than her old job – if she could find employment at all. The value of her home had declined by more than 12% in the decade since she had made her purchase. Instead of building equity, she was “under-water” on her mortgage. Recently, her home was foreclosed and she found herself in a position that is all too common today. While not homeless, she is facing bankruptcy and the attendant emotional and financial difficulties that are inevitable.

If the proper tools and analytics had been available to the lender in 2002, chances are things would have turned out better for all parties. It is reasonable to assume that the lender, recognizing the instability in the housing market, would have modified its lending practices and terms offered to borrowers would have become more restrictive. In fact, there is a high probability that the instability would have never reached such extremes; lenders might have acted promptly and prudently to insure that sustainability was protected, and their subsequent losses might have been significantly reduced.

My friend might not have qualified for a loan at all, and would have perhaps been forced to continue renting until she accumulated a suitable down payment. If and when she was ready to make a purchase, she might have had to settle for a “starter home” rather than opting to buy her dream house. These, by the way, are not bad things. Until recently, this was regarded as the appropriate path to home ownership in America.

So here’s the message. Prudent lending and investing must be based on more than just accurate appraised values. Values must be scrutinized for their sustainability as well. As my friend and her lender discovered, an accurate value for a home yesterday might vary substantially from an accurate value for the same home today. That does not make either value conclusion less accurate, but it does reveal that markets fluctuate and values must be viewed within the context of current market trends and long term sustainability.

If your valuation professional cannot provide you with both a reasonably accurate value conclusion, supported by industry standard analytics, and a reasonable measure of sustainability, you need a solution that does.

• ‘Sustainability’ of Property Values [Valuations Unlimited, LLC]

Last week’s Manhattan housing market certainly ended on a high note – literally. You know that old saying about things happening in threes? My word of the week is “trifecta” – it’s always been a favorite, along with “neat, blowhard and Muttontown.

My favorite phrase is “The Trend is Your Friend” and one needs at least 3 data points to make a trend. Sometimes I append “…until it ends.”

I spoke about The $70M Condo versus $52M Co-op Smackdown, Manhattan Style last week but there is another big sale to make headlines was scooped by Alexei Barrionuevo at the New York Times. Alexei corrected me on my Twitter feed that the price was “over” 90M.

It’s all quite breathtaking when you look at this sale in context of the entire market. After the recent record setting sale of $88M, I whipped up However what sets the last 3 sales of $52.5M, $70M and $90M+ apart is they all exceed 10k square feet. The recent $88M sale was a nominal 6,744 square feet.

This record sale won’t close until the building construction is completed next year but I am not so sure it will still be a record at that point.

The seller, the Extell Development Co., had been asking $98.5 million for the 10,923 square-foot condominium. Gary Barnett, Extell’s president, wouldn’t confirm the exact price the condominium went for or who the buyer was, but he would say the apartment sold for about $8,000 a square foot.

Located on the 89th and 90th floors of the One57 building on 57th street, the apartment features 23-foot ceilings, rosewood flooring, panoramic views of the city, Italian marble and custom hardware and light fixtures.

The building, which is still being constructed, includes a total of 95 condos and is built on top of a five-star Park Hyatt hotel. Prices start at $6.75 million and about half of the units have been already sold, said Barnett. Occupancy won’t begin until early next year.

The purchase follows two other recent blockbuster sales. In December, a Russian billionaire paid $88 million for a home once owned by ex-Citigroup CEO Sanford Weill. Then, earlier this week, a Park Avenue co-op was sold for $52.5 million, a record for a co-op apartment.

“I call it the 10,000-square-foot trifecta,” said Jonathan Miller, president of Miller Samuel and one of New York’s best known appraisers. “I think it’s a statement about global economic instability.”

The Weill sale broke the ice. “When that happens, other high-end sales come in clusters,” he said.

Helping to drive up the sale price was a lack of competing properties on the market, said Miller. The apartment came to the market at a time when there weren’t many competing super high-end products.

It’s also in a prime location, near Central Park, the Midtown business district, theater and restaurants. It’s just down the block from Carnegie Hall.

Miller said many of the ultra-high-end purchases in New York and other expensive markets are done for investment purchases — at least in part. With the future of the eurozone in question and bond yields low, there’s not a lot of other attractive investing options.

“New York real estate is a hard asset, a safe haven for investors” he said. “Relative to other markets, it’s still seen as safe. I would not be surprised to see more of these sales.”

The 11,000-square-foot (1,000-square-meter) unit, spanning the 89th and 90th floors of the building known as One57, sold at a price between $8,000 and $9,000 a square foot, Gary Barnett, president of developer Extell Development Co., said in a telephone interview. He declined to name the buyer.

The deal is the second this month to break a record as trophy apartment hunters clamor for a limited number of units in New York’s ultra-luxury market. Howard Marks, chairman of Oaktree Capital Group LLC, paid $52.5 million for a duplex at 740 Park Ave., the most ever for a Manhattan co-op, according to property records filed May 11. This week, a 10,882-square-foot duplex at the Ritz-Carlton was shown as no longer for sale on listings website Streeteasy.com. The New York Post reported that casino mogul Steve Wynn purchased the home for $70 million.

“You have a 10,000-square-foot trifecta this week,” said Jonathan Miller, president of New York appraiser Miller Samuel Inc. “There is a small group of affluent investors that are looking for trophy properties and New York has been happy to oblige. I wouldn’t be surprised if there were more coming.”

The penthouse at One57 was listed for sale at $115 million after a series of price increases, according to Barnett.

“That was a number we felt made a lot of market sense,” he said.

The sale will close within two years, Barnett said. One57, which will become Manhattan’s tallest residential tower, will begin delivering units to buyers in the second half of 2013.

The New York Times reported the penthouse sale late yesterday.

The deal tops the previous Manhattan record set in February, when the full-floor penthouse owned by former Citigroup Inc. Chairman Sanford Weill was acquired for $88 million for the daughter of Russian billionaire Dmitry Rybolovlev. The buyer at One57 wasn’t Russian, Barnett said.