Archive for the ‘Valuation’ Category
the 11 day week
It’s been 11 days since my last post… long week, eh?
The litigation support portion of our business has been hogging my calendar most of this month. I’ve had 5 days of deposition in two different cases (plus cross-country travel, prep, etc.) in the past 11 days. Yes, that’s every bit as busy as it sounds. The month isn’t over — I have two more dep’s scheduled for May (both, thankfully, in Seattle) and then two the first week in June (both, thanks to the Gods of calendars, in New Orleans).
As if that wasn’t enough, the BP Oil Spill matter is on my calendar each and every day. We’re in daily communications with law firms in the Gulf states and elsewhere, and we’re working on a methodology white-paper for distribution later this month. There is a CLE conference scheduled for Atlanta in June — Greenfield will have some-sort of presence. More on that in the next couple of days. If you’d like a copy of the white paper when it’s published, please drop us a note at info@greenfieldadvisors.com
Of course, the real estate advisory and investment side of our business continues to be a busy place. Sigh… It’s nice to be busy.
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Newsletter, oil spill, and such…
Just sent out the April issue of The Greenfield Advisor. We cover quite a few things, but the front-page article is about the oil spill in the Gulf of Mexico. Greenfield is already gearing up a file on this matter, and given our history in such situations, we can already see the salient issues which will need to be addressed. More on this later….
We also include info on recent meetings of the American Real Estate Society and the Real Estate Counseling Group of America, as well as our thoughts on the current state of the economy. Enjoy!
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RECGA
ALSO, I just got back yesterday from Las Vegas, attending the semi-annual meetings of the Real Estate Counseling Group of America. It was a terrifically well-attended meeting, organized by Dr. Jeff Fisher of U. Indiana. RECGA is something of a “think tank” on real estate valuation, formed about 40 years ago by the late Dr. Bill Kinard. Over the years, its membership has constituted a “who’s-who” of real estate appraisers, counselors, professors, and investment advisors. I’ll outlined the program and some of the more interesting highlights in the upcoming issue of The Greenfield Advisor. Drop us a not at Greenfield (info@greenfieldadvisors.com) if you’re interested in a copy.
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American Real Estate Society
I just finished participating in the 26th annual meetings of the American Real Estate Society, one of the world’s premier real estate academic groups. Participants are a mix of academics (both U.S. and global) as well as senior-level researchers from the private sector and the government.
There was a significant focus on valuation models — lots of discussion of where the appraisal industry and methodology are headed. I’ll elaborate more on this in the April issue of The Greenfield Advisor, our semi-monthly newsletter, which will come out later this month. If you’d like to be added to the subscription list, just contact info@greenfieldadvisors.com.
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Chinese drywall… redux
Judge Eldon Fallon just issued a ruling in the first Bellweather CDW cases (click here for the news article). It completely follows the recent Consumer Products Safety Commission guidelines that the homes need to be stripped back to the studs, and also leaves open the reality that there are other losses such as loss of use and enjoyment. We’ll be examining the potential stigma losses (post-remediation) in the coming weeks.
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all I can say is…. whew…
Twenty years ago, when the Savings and Loan Crisis was all the rage, a significant number of professionals — appraisers, brokers, mortgage lenders — went to jail over mortgage fraud. I’ve been thinking in the back of my mind that the dam would eventually burst on this housing crisis with similar ends. (Indeed, I consulted on one of those prosecutions recently, which resulted quite a few folks going to Federal prison.)
Rachel Dollar, an attorney in Santa Rosa, California, has compiled a great blog which keeps track of this — www.mortgagefraudblog.com. I’ve added a link to this over on the right. The volume of prosecutions listed on her site is utterly amazing. Check it out.
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Chinese drywall
The consumer products safety commission finally issued an interim set of guidelines regarding Chinese Drywall remediation. You can view the entire document as a .pdf at: http://www.cpsc.gov/info/drywall/execsum0410.pdf (Naturally, you’ll need adobe reader to view it, if you don’t have it already — it’s free — visit www.adobe.com.)
The guidance is “interim” for several reasons. Most importantly, issued regarding off-gassing of the drywall itself were studied at Lawrence Berkeley National Lab, while secondary impacts (e.g. — electronics, appliances) are being studied at Sandia National Lab. The latter’s preliminary results won’t be available until this summer.
Nonetheless, even these preliminary guidelines are significant. They call for a complete “stripping” of the drywall and electrical wiring (including breaker systems) back to the studs and then refinishing the home. Coupled with the probable need to replace electronic appliances (e.g. — alarm systems, computers, microwaves) and the expense per home will be huge.
This does not yet even address the question of property values post-remediation. Our experience with other construction defects situations, such as synthetic stucco and moisture intrusion cases, suggests that even after remediation, these homes will be problematic to market.
I’ve inspected several Chinese drywall homes recently, including situations where the homes have been remediated (albeit without authoritative guidance) and situations in which the homes are still affected. Included among the homes I inspected was the home of Sean and Beth Payton — Sean, of course, is the coach of the current Superbowl Champions, the New Orleans Saints.
Cases are currently headed for court in Louisiana and Florida. I’ll keep you posted.
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Where does everyone live?
It’s an interesting question for a couple of reasons. First, I’m in the real estate analysis biz, and since housing is a b-i-g chunk of real estate, it’s interesting from a purely academic perspective.
Second, though, there is a fair argument that at the apex of the recent housing bubble, we got the mix wrong. Congress, in their infinite (cough… cough….) wisdom, encouraged home ownership for all. It sounds like a noble idea, but one without too much economic sense. Simply put, even though the United States is LARGELY a nation of homeowners, we are not ALL homeowners. There are a lot of important economic reasons for this, w-a-a-a-a-y behond the scope of this blog. That having been said, over a reasonably long period of time, (say, a few years), the supply side of the equation can more-or-less match demand, and an equilibrium of sorts can emerge.
The problem arises when non-economic forces enter into the equation (such as artificial government stimuli) and home ownership is foisted off on market participants who really should be renters. There are plenty of ways to do this — mostly through artificially high levels of liquidity.
It’s hard to say exactly WHEN the recent housing bubble crested, but a quick glance at the Census Bureau’s American Housing Survey as of the end of 2007 is probably pretty close. (Anything closer than that would be pure conjecture anyway). We had 124.4 million housing units in the U.S., both rental and owner-occupied, of which 110.7 million were occupied. The different — a vacancy rate of about 11% — is pretty normal. This number includes new construction and actual vacancies, and there is a fairl amount of economic literature showing that a very low vacancy rate is not efficient in a healthy market, particularly among rental units.
Here’s where life gets interesting. Of the total number of occupied units, 75.6 million were owner-occupied, or about 68%. Many economists now agree that this proportion was too high — that the ownership rate in America was artificially propped-up by Congressional direction toward “easy” mortgage money. Since it was those “easy” borrowers who got in trouble first, one of the important questions being asked now is, “What is the best level of owner-occupancy for the market?” In a free market economy, “best” is what emerges at equilibrium without any external artificial interference.
We don’t really know where the market will level out, but discussions suggest the owner occupancy level should be closer to 60% than 68%. If this is the case, then in a static no-growth model, we would have about 66.4 million occupied dwellings. That’s a shift of about 9.2 million homes. Naturaly, many of these will be absorbed in the rental side of the equation, and that’s what we’ve seen lately — it’s why the fundamentals on new apartments has looked rugged for a while. That ruggedness won’t last long — much if not most new construction built for owner-occupancy is not suitable for rental, at least in the long-term. Luxury homes, luxury condos, and vacation “second” homes are either the wrong housing product or in the wrong place for such an easy shift to be accomodated. As such, we should see the apartment fundamentals get back to normal before the owner-occupied side of the market does.
Our natural “equilibrium” absorbtion of new housing in America is about 1.9 million units per year (about 1/3 rental and about 2/3 owner-occupied), so a big chunk of any excess will be eaten up by new demand as we come out of the recession. Nonetheless, it will take a while for the excess supply to be absorbed and for things to get back to normal in the new housing sector.
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Now where was I?
I’ve been gone an embarrassingly long SIX MONTHS (or about that)… let’s see, what have I been up to?
First, Greenfield is still around and busy. Like so many other firms, we had to do some belt-tightening in early 2009, and that left a lot more stuff on my desk. Ergo, this blog (and a lot of other “important but not urgent” stuff) got left on the back burner.
Second, it’s increasingly hard to write ABOUT the economic turmoil when you’re PART of the economic turmoil — or at least ADVISING clients who are deep in the depths of the front-page issues of the day.
So, I’m back — at least I’m going to TRY to be back, on a regular basis this time. Recent event number one — I’ve now spoken at two different conferences on the Chinese Drywall matter — both legal CLE conferences and both, coincidentally, in New Orleans. For the uninitiated, Chinese Drywall (“CDW”) was imported a few years ago, at the height of the housing boom, when U.S. supplies of drywall simply couldn’t keep up with demand. The shortage was exacerbated by the numerous hurricanes (Katrina, Wilma, etc.) that hit the southeastern U.S.
Now, apparently, CDW contains impurities which are allegedly linked to other problems, both structural (degradation of copper elements) and health/safety. Hundreds of lawsuits have been filed, and the Federal District Court in Louisiana has been assigned oversight under what is known as a “multi-district litigation” or MDL. They hope to conduct bellweather trials in early 2010, although the venue isn’t yet known (probably state court in Florida). Naturally, Greenfield has been involved since the onset with position papers on the economic and valuation implications. For a pdf copy of our most recent white paper on the topic, please click here.
From a small northwestern observatory... 