From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for April 2011

Greenfield Named a “Best Place to Work”

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A little bragging opportunity — and we’ll be sending out reams of press releases on this — but I thought I’d give you guys an early peek. Seattle Metropolitan magazine just released it’s list of the 20 best places to work in the Seattle market. You’ll recognize some of the names on the list — and We’re terrifically pleased that Greenfield is #9 on the list of best places to work in Seattle.

Seattle is a great place to run a business — extremely bright people are attracted to live here, and as a result, a firm like Greenfield can pick and choose the brightest minds who want to get into real estate analysis. While we have two great university-based real estate programs in the state, we’re able to attract new hires from the top programs all over the world — indeed, one of our most recent hires had just finished his masters degree in real estate in the U.K.

Conversely, to keep and maintain such a creative staff, we have to offer an exciting and intellectually invigorating place to work. When we’re in a fairly small city, and competing against some of the most creative and exciting firms in the world (e.g. — Microsoft, Costco, Starbucks, the Russell Group, Weyerhaeuser, Amazon, Expedia, Boeing, Paccar, Nordstrom, etc.), we have to constantly strive to be the best.

Thanks for the chance to brag a bit. This is a REALLY big deal, and I’ll be bragging more and more about this in the coming weeks.

Written by johnkilpatrick

April 28, 2011 at 8:58 am

Home-ownership vacancy rates

Regular readers will recall that we’ve linked continuous decline in home ownership rates to price instability. In short, prices won’t start rising again until home ownership rates stabilize. (They’re down from about a recent peak of 69.5% to about 66%, and we believe they will continue to fall to about 64%). One MORE piece of important data just hit our desks, in the form of the Census Bureau’s 1st quarter home ownership survey.

The report is full of useful data. For one, the number of owner-occupied units in the U.S. actually fell from 1st quarter 2010 to 1st quarter 2011 (as we would expect), while rental occupancies continue to increase. Rental market supply (in essence, construction of new apartments) is keeping pace with demand, and rental vacancy is just below 10%, slightly lower than the 10% -11% range we’ve seen in the past few years, but not so low as to put inflationary pressure on rental rates. (Of course, this varies from one part of the country to another.)

Among “owner-occupied” homes, though, the vacancy rate continues to rise. See the chart below for a vivid explanation —

If this was a classroom exercise, I’d ask the students to identify the pre-recession equilibrium level, which appears to be about 1.6% to 1.8%. We can then identify the point-of-inflection signalling the impending disequilibrium in the housing market (when vacancy rates increased significantly — 2005). This inflection point, of course, signaled a great time to start shorting mortgage-backed securities, since it signaled the beginning of an increase in default rates. Of course, once can point at this and say “hindsight is 20-20”, but we know that the folks inside many of the banks, who were hawking mortgage-backed securities to their customers, were reading those very tea leaves back mid-decade, and shorting the very same securities they were promoting as safe investments.

Japan Earthquake

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Just confirmed — I’m speaking at two big legal conferences on the Japan Earthquake, with focus on the insurance and re-insurance issues. I’ve been asked to address the valuation questions and the impacts on Japanese banking, finance, and housing.

The conferences will be held on May 17 in San Francisco and in June in Philadelphia. For more information, including an agenda, roster of speakers, and sign-up form, visit

Written by johnkilpatrick

April 18, 2011 at 7:36 am

Musings of an expert witness

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I JUST spent the entire week in booming, Towson, MD, testifying in a little-known, not-well-covered case called “Allison v. Exxon.” On the surface it seems like a fairly straight-forward case: In 2006, an Exxon station in rural Baltimore County spilled a lot of MTBE-laden gasoline (at least 26,000 gallons). The gasoline flowed into the drinking water aquifer, and contaminated the well water for a fairly large, up-scale neighborhood. Hundreds of houses and dozens of businesses are affected, and after 5+ years, the remediation is still ongoing. A small, preliminary case went to court a couple of years ago (we were not involved) and the significant jury award demonstrated that the subsequent cases, as they went forward, had the potential to be extremely expensive for Exxon and would potentially send a message about MTBE litigation.

The current trial, which has been ongoing for several months, will continue for at least another two months. Then it goes to a jury. As the stakes have gone sky-high, so have the players. Both Exxon and the plaintiffs up’d the ante on law firms. Exxon is now represented by DLA Piper, perhaps the largest corporate law firm in the world. The plaintiffs are represented by Peter Angelos, one of the most successful trial attorneys in America (and, coincidentally, the owner of the home-town Baltimore Orioles.) Naturally, we were called in as real estate valuation experts and economists to measure the monetary damages. I just testified this week, and of course my involvement behind the scenes is ongoing.

I actually testify in fewer cases than people might think. At Greenfield, we do a LOT of litigation support, but we’re glad that our work helps our clients settle the majority of cases outside of the courtroom. (For more on this, see a recent article on the website, Success at the expert witness “business” requires thinking not only about what we do but more importantly thinking about HOW we do it. As such, the past week has caused me to focus a lot of attention on that “how” component, and I’m writing this blog entry more for my own memorialization than anything else.

As I think about the “how”, three things come to mind:

Experts have to be careful with their egos. The best experts have very strong egos — they have to, because in the run-up to trial, their opinions, expertise, and findings are challenged repeated. Good experts have very strong internal editorial systems within their organizations, and are constantly willing to put their own egos aside in favor of the pursuit of excellence. However, to get on the witness stand (and deposition, and meetings with clients, and inevitable reversals), the expert has to be able to withstand a withering intellectual assault. A strong enough ego, however, can be a two-edged sword. A clever opposing attorney can make mince-meat of an egotistical blow-hard on the witness stand. I’ve seen really fine testifying experts simply melt-down under that sort of pressure. It’s not pretty.

Stay at the cutting edge of your body of knowledge, but not beyond it. There is a “safety zone” right at the front edge of the body of knowledge. Whatever the field, there is always a “current body of thought” concerning methods and standards. In real estate valuation, it’s obvious that the older methods have been severely called into question during the current real estate melt-down. As it happens, there are great new methods that have been tested and found superior (hedonic modeling, time-series indices, contingent valuation, etc.). These are well tested and established methods. Ironically, many “old-hands” at testifying in court are too busy playing “witness” and spend very little time maintaining themselves as “experts”. They fail to keep up with the current literature. They may publish, but it’s usually about things that were old-hat 20 years ago. When faced with newer methods from the other side of the courtroom, they have no foundation to comment, and as such do a poor job for their clients.

Keep it simple Ironically, most “expert” work is highly technical. However, every testifying expert should be able to describe and discuss what he or she did in a very short “elevator pitch”. It has to be simple. In my experience, jury members are usually pretty bright, and typically want to be engaged in the “show”. However, they want to know that there is a simple theme to the expert’s work. If it’s too convoluted, even though it may be true, it doesn’t “seem” true, and hence won’t be compelling to the jury.

Written by johnkilpatrick

April 16, 2011 at 9:58 am

Second quickie from the WSJ

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On the same page (C-1), Nick Timiraos contributes “Critical Signs in Foreclosure Talks”. This is the followup to issues I discussed a few months ago regarding the botched foreclosure processes at many banks. Regulators had hoped to put in place a far-reaching settlement, to forestall many state Attorneys General from filing state suits which would put all of this in a variety of courtrooms (probably ultimately in a multi-district litigation in the Federal Courts, and from there… no one knows…). The regulators and the AG’s are on opposite sides, although both seem to agree that the banks need to be taken out back of the woodshed and given a good spanking.

I have zero sympathy for the banks — it’s one thing to create a high-speed mortgage assembly line, but even the auto makers have figured out how to keep track of the documentation on each car they make. Bankers (and the thousands of lawyers they employ) are supposed to be good at this stuff. If they can’t keep track of a $100,000 mortgage, how exactly do they keep track of a $100 checking account balance? (They do seem to be great at keeping track of every $1 I owe on my visa card.)

However, from a market perspective, this all has extremely serious implications. As I discussed some weeks ago, if the foreclosure log-jam isn’t fixed, the home credit market won’t get fixed either. Housing starts, existing home sales, and millions of jobs depend on straightening out this problem. Hence, this is not just a trivial argument about who gets to spank the bankers.

Written by johnkilpatrick

April 12, 2011 at 2:42 pm

Two quickies from the WSJ

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Page C1 today has two important articles that caught our eyes. I’ll write about the first right now, and follow up with the other one later today. First, Kelly Evans contributes “Overlooked Inflation Cue: Follow the Money.” It shouldn’t come as a surprise to anyone that money supply growth in the western economies was rampant during the run-up to the current recession. In the U.S. and the U.K., M-2 growth peaked in late ’07 to early ’08 (you don’t have to be a monetarist to figure that out). The Eurozone kept pumping money at faster rates right up to mid ’09

Where money supply growth went from there, though, was a bit of a mixed bag. In the U.S., the annual growth in M-2 fell from a peak of about 12% right before the recession to a low of about 1.5% in early ’10, and has stayed below 3% since. (This basically supports my contention that the sturm-and-drang over QE-2 was all politics.) The U.K.’s growth rate peaked at about 9%, fell earlier than ours, and hit its bottom (about 2%) in mid ’09. Intriguingly, the U.K. money supply growth rate bounced back immediately, with the virtual money presses running full-speed to get the money supply growth rate back up to about 6% in early ’10, but then falling off to about 4% today.

In the Eurozone, the money supply growth tracked very closely with the U.S., bottoming with ours in mid ’10, but since then, the European bankers have started pumping money back into the system, with their M-2 growth rate headed continuously back upwards (at about 4% today).

There are two important implications for all of this (plus my afore-mentioned observation about QE-2). First, the three big western currencies are on decidedly different tacks. The idea of opposing viewpoints among the big western central bankers is not well explored in today’s decidedly multi-polar world economy. (Back when western banking was a closed system, everyone else in the world could only sit back and watch. Now that the Chinese — and even the Japanese with all their other troubles — are more than sidelines spectators, one can only wonder how disagreements among the western bankers will play out.)

Second, though, the really significant point is that despite all of the different paths of M-2 since 2009, all of the growth rates are decidedly down from the earlier peaks. From a real estate perspective, this has major implications. As investors diversify away from stocks, real estate and bonds have a certain equivalency. In a no- or low-inflation scenario, bonds are viewed as the more secure investment. In a higher-inflation world, real estate is viewed as a bond with a built-in inflation hedge. Hence, lower inflation portends well for bonds but poorly for real estate.

One might argue that healthy bonds means low interest rates for real estate, but this ignores the fact that interest rates are already at historic lows. Hence, what real estate needs today is a nice raison d’ĂȘtre, which a tiny bit of inflation would give it. I’m NOT pro-hyper-inflation, mind you, and inflation flat-lines are overall healthy for the economy. However, if real estate investors are hoping for an inflation kick, it doesn’t look like they’re going to get it.

A last minute edit — Later in the day, I noticed that yesterday’s USA Today had a “snapshot” (a little graphic in the lower left corner of the front page) titled “Which Investment Will Perform the Best”, taken from a survey recently conducted by Edward Jones. Topping the list was Technology (33%), follwed by Gold (31%), Blue-chip stocks (10%), Real Estate (9%) and International stocks (9%). Given that gold and real estate are both thought to be inflation hedges, it appears that the market still worries in that direction.

Written by johnkilpatrick

April 12, 2011 at 5:00 am


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Just came back from a day in Reno. (Hard to type that without hearing Johnny Cash in my head.) Sitting in the airport, I struck up a conversation with a young man sitting next to me. He asked what I did for a living, and as soon as I told him, he wanted to know my “economic prognosis” for Nevada. Whether I had a good one or not, I gave him my two cents worth.

Nevada — and Florida, for that matter — primarily make their living from three things: tourists, retirees, and people who care and feed the first two categories. (One might be tempted to add Arizona into the mix, but that would be a bit of a mistake. Arizona’s economy is a bit more complex. One might argue that Florida and Nevada’s are, too, but let’s go with it for a while.)

One immediate “hit” to the economies of both Florida and Nevada was tourism, as families (and in the case of Las Vegas, conventioneers) had to tighten their belts. However, this segment is actually coming back a bit, albeit not totally to pre-recession numbers. For example, Florida’s Gulf Coast Panhandle (the nine counties in western Florida) were actually seeing a resurgence of tourism until the Gulf Oil Spill. Occupancies in the Gulf Coast region on Memorial Day, 2009, were quite good, but then the oil spill hit, and occupancies were dismal on that same weekend, 2010.

Las Vegas is certainly in trouble, but some of that came from overbuilding. The Saraha just closed — it had been slated for a makeover, but the owners have decided to “go dark” for a while instead, waiting for the economy to turn. The Las Vegas City Center continues to be a prime example of speculative overbuilding, both rooms and casino space.

But, Reno isn’t Las Vegas. Sure, Reno has casinos and some gambling, but it’s more of a retiree area. This segment of the population has been hurt in two ways. First, they can’t sell their houses. Moving to Reno (or Ft. Lauderdale) generally requires selling a house in Los Angeles or Groton. As I’ve noted previously, the supply of existing homes is pretty stable, and even though new construction has tanked, the demand for owner-occupied homes is actually shrinking from its pre-recession peak of about 69.5%. Thus, retirees may WANT to move to Reno, but no one will buy their home in Los Angeles.

Second, POTENTIAL retirees look at their 401-K’s and start thinking, “wow, I guess I’ll need to work a few more years.” This has some long-term issues for the economy. First, every retiree who “stays” on the job means one applicant at the beginning of the work-force pipeline who can’t “get” that job (or at least the job that leads to it.) Second, early retirement is more care-free (both personally and financially) than late retirement. Thus, early-retirees generally spent financial assets into the system without making many demands ON the system (health care being the biggie). Now, many retirees will defer retirement until the fateful day when they start demanding more of the system than they are able to put into it. If we think medicare and social security are problematic NOW, wait until that reality takes hold.

From a housing perspective, large parts of the U.S. (Nevada, Florida, and, yes, big swaths of Arizona) have been built to accommodate retirees in between the time they “sell the big house” and the time they move into assisted living. A prolonged “work-life” means a significant lowering of demand for this segment of the housing market.

Written by johnkilpatrick

April 11, 2011 at 4:25 am

sushi or dead fish?

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I’m at the semi-annual meetings of the Real Estate Counseling Group of America (RECGA), a small (capped at 30), invitation-only group of real estate experts founded by the esteemed Dr. Bill Kinnard back in the 1970’s. Over the years, RECGA members have included editors of major journals, presidents of various real estate academic and professional organizations, and advisors to major investment groups. We’ve nearly lost track of how many text books have been written by the members — well over several dozen, plus many hundreds of journal articles, book chapters, and scholarly papers.

A few somewhat random observations:

Investment activity is up, but the major impediments are lack of capital and excess inventory
Apartment “cap” rates are falling again, with lots of activity
The credit markets are still a mess, with no consensus on when they will be “fixed”

Wonderful presentations (patting myself on the back for one of them), with great interaction on complex issues in real estate analysis and valuation.

Why the title to this post? Simple — one real estate investor was quoted as saying, “The market today is like a platter of seafood. I have to figure out which are sushi and which are just dead fish.”

Written by johnkilpatrick

April 2, 2011 at 7:26 am

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