Jonathan Miller on Real Estate After the Coronavirus

Masters in Business. Very glad to be here and getting a break from the self quarantine. Talking to another human being is always nice. So let's talk a little bit about what's going on. We're recording this the last week in March. Uh. Normally this is the time of year when we would see a ton of new real estate listings and open houses and really the kickoff of the spring selling season. How's the real estate market? Yeah, it's uh, you know, it's interesting. The fact is there's very little

data to test the water, so to speak. Really the only thing we're seeing right now that is in real time because real estate generally is a much slower moving type of asset class is the change in patterns of

listing inventory. So, for example, in Manhattan, for basically since the beginning of time, inventory arises from year end of any given year, whether it's a weak or strong market, through the end of March, and over the last five years it's averaged about a ten percent increase plus or minus a couple percent every year, and this year it's down nine. So we're not seeing people put properties on the market, and that literally is one of the only valid data points right now in the housing market, at

least in New York. We're seeing stories about contract activity, but that's actually misleading because contracts typically, I think when people think of a contract, they think of you know when Byron sellers sort of shake hands and you know, boom um, that's the that's the contract. But the reality is the contract data that we're seeing now represents two

to three weeks ago. An offer is made, it's accept by the seller, and then you have um or vice versa, and then it goes to the attorneys and takes a couple of weeks. So I really think next week or the week after is where we're going to start seeing the real slowdown in activity. So real estate on a big lag. Well last week I saw a really amusing

article on Bloomberg News. People are still putting their mansion on the market, And is that really going on or is that still part of the leg that might have been happening in February and the beginning of March. But it's listenings have dropped off, the things have dropped off, at least in you know what we're seeing when you look at January and February this year after at least

in New York Metro. It's been a it's been a tough couple of years with the onslaught of new taxes beginning with the two thousand eight eighteen and then into nineteen, all kinds of headwinds for housing. And then there was someone referring to the change in the salt deductions salt tax. We had the rent law, which punished you know, landlords, which is primarily what investors are. We also saw an

increase in the mansion tax transfer tax. So there's a lot of headwinds, you know, to use that phrase, our word, and now um we have this we saw an upticking sentiment. Um, a lot more offers are being made and all that is sort of out the window because we have a new sort of milestone to grapple with in the market,

and that's the uncertainty of the virus. You know. It's interesting, Um, A lot of comparisons have been made to other seminal events in real estate, like the UH nine eleven moment um, like the Lehman moment, and they're all very different in

scale and you know, and what actually occurred. But what's a little different this time is that in those prior to moments UH, there was actually another a new day, And the further you got away from that moment, you could you could sort of process it the tragedy and start thinking about the future. Right now, we don't know other than anything other than it's got further to go, and we don't know how much further it has to go. So there's there's definitely a grain at to the outlook.

So one little ray of sunshine amongst all this negativity. The FED took rates down to zero. That has to be good for mortgage rates or not. Tell us what's going on with mortgages. Well, if you look at Freddie Mac's thirty over the last thirty days, fixed UH mortgage rates actually are a little bit higher now than they were at the end of February. And and one of

the reasons is just capacity. That many lenders UM laid off a large amount of processing staff six or nine months ago when there wasn't much action going on in UM you know, changes in rates and there's some stability. In addition, especially on the in the refi world, there's

a tremendous concern about liquidity. In other words, you know, when you have escalating layoffs, rising unemployment and people will say, you know, in the middle of their application and lose their job, that is a much different risk profile than if we were in the conditions we were, you know, a couple months ago. So UM the low rates in many ways have fallen on deaf ears in the housing market. Initially got everybody excited that it would help housing run

through this crisis. But I think it's have It will have limited effect, certainly better than not doing it, but not not much tangible evidence that it's going to make a difference. I was kind of fascinated, Jonathan by something I read about on your weekly newsletter, and I was very surprised to read that brokers are now hiding the number of days that houses have been on the market from buyers. What is that about? Why would anyone imagine that that is helpful to buyers? And shouldn't we be

in favor of more transparency in these transactions? Well, Barry, you hit it on the head that we should be

in favor of greater transparency. What the real estate community of the brokers have been grappling with um in many markets is that things have slowed down before we came into this crisis in certain segments in the market, and they've been dealing with anxious sellers and then we have this crisis, and you know, it's being presented as let's give the sellers a break, and let's essentially there's no other word for it, but hide the calculation for days

on market. On some list sites, like in New York, Street Easy, which is owned by zillo Is, announced that they will be hiding days on market. Same thing with the Real Estate Board of New York, which is somewhat of our local multiple listing system. And we hear here of this in other parts of the country, but other parts aren't. The problem is with this is that it ignores I mean, last time I checked that there's a buyer and a seller in each transaction, and the buyer

is essentially this data is being hidden from them. The problem is, or actually the the you know, what's actually happening is the raw data, like the listening dates, things like that are not being hidden. But when you open and look at a listing, it instead of saying, you know, on the market a hundred eight days, it'll just be blank or not or hidden. And to me, that breeds that will breed future distrust between the consumer and the

real estate community. And I think that the actual reason they're doing it, having talked to many agents about this over the last couple of weeks because I've sort of been sparring with the community about this specific topic, is that the actual motivation is really not to help the seller. It's to really help the real estate agent keep the listing.

In other words, um, you know, consumers don't want to say, hey, you know, I'm going to take my home off the market because nothing's going to happen for the next two or three or four months, and they're uh, and the real estate agent is worried that they're going to lose the listing when they come back on the market. Somebody else might get it, and that's not good for the market. You can't cherry pick data. So Jonathan, why not a

more targeted solution than not reporting this? Why not just toll days on the market for I don't know, ninety days until the coronavirus theoretically passes. Let's say this crisis is over in ninety days and then we all go out and and you know, start rates a law, and we start buying up houses. Um, you know, as a nation. The reality is that every house that was on the market in this period has an additional ninety days added to the days on market. The consumer is not open there.

They are going to understand that we just came out of this. So to me, it's it's a lot about nothing. It's not going to help stimulate sales activity, and it endangers the idea of people coming back in because they're going to say, well, are these numbers real now? Are they being tweaked? Um? I just think the whole idea is a bad idea. So what's going on in the

world of appraisals? How are people doing appraisals on either refies or new purchases If everybody is socially distancing, right, It was quite astounding up until a week ago, prior to the last week, when there was an announcement by f h f A, which is the regulator over Fannie and Freddie UH, and there were some standards being set for allowing praisers when mortgages are done, not to physically inspect a property if they're in danger, and we were

getting for a couple of weeks we stopped inspecting interiors of properties in New York prior to AMA the Governor's um shut down or cars I shut down UH and because I I just couldn't put my staff in harm's way. UH. We had a couple of close calls, and it seemed crazy, especially when it became apparent that you don't have to be you don't have to be symptomatic to be a carrier.

So not only are we putting our staff in a harm's way to do an inspection on a mortgage appraisal, but we're also putting the homeowner or the occupant of the home in danger. So that seemed out of the question.

So there was a stalemate, and across the agencies and the mortgage spectrum, appraisers were rapidly growing numbers pushing back on being forced to do appraisals interior inspections, and so essentially what is coming out of all this pushback is that there are different types of alternatives, something that my firm is doing a lot of in New York because our risk to our praisers are going on public transportation. It's not that they're in a car insulated driving up

to the curb. You know, that's really not an option to New York as it might be in the suburbs. So that what's happened is there's been these solutions that are evolving and now we're you know, we're doing essentially what they're called desktops or you're sitting at your desk and it is and we're actually getting photos from the homeowner. Um all this is less than a full tear inspection

by a professional. But but the idea, and I think government's thinking is that it helps liquidity, keeps things moving forward. What they're not is there not on cash out reef finance and they're not waiving the interior inspection requirement, so that that makes it all problematic. Um and you know, the second this gets out of you know, um, if this became mainstream where we could do um no inspections for reefs. I can only imagine the fraud and the

um the predatory lending that would simply explode UM. And so I don't think you're going to see as much of that in the solution, simply because the emphasis is on the sales side, not the reef buy side. Quite fascinating. Let's talk a little bit about real estate in the time of pandemic. What can we do virtually? Can can we use face time to inspect the house? Can you

do these virtual three D showings? Or is real estate one of those things that you literally have to get into the space and look around and see what's going on yourself. So I think that virtual all is clearly growing to be a an option for many during this crisis,

But I don't think that it goes mainstream. I think it's more on the margin, uh, And I think because of the human element of you know, the sort of the passion around housing, I think it's it's a lot harder to convince many people with their largest asset UH in play here to just do a sort of an all digital. However, that's the thinking now, and uh, you know that may change if this goes long enough. Uh,

this crisis goes long enough. One of the things that has been really problematic that I think will will benefit from the virtual phenomenon would be actual closings. Uh. You know, you can be in a state like Maryland where you can do closing almost entirely on a single iPad, and you go across the line to save orge in you and it's you know, you're signing papers that say you signed another paper. You know. The tremendous um you know, tremendously inefficient, and I think there's gonna be a lot

of clean up of that. One of the things we're seeing in the appraisal industry or the valuation in general, is something that we call curbside appraisals. And the idea is that you you know, if you're in the suburbs, the appraiser drives up to the front of the house. Uh they can, you know, there's nobody around. This social distancing, they can kind of walk around the exterior of the property.

They physically uh you know. And a friend of mine actually just wrote about this in California, he's already doing it where you call the homeowner on face time and then they literally walk you through the house, you point, you know, asked him to point in certain directions and make sure that you can see things. And then while you're doing it, because you can't capture the video with FaceTime, and you know, I'm sure there will be alternatives or

there is an alternative. Um, they're just doing screenshots of the video screen that they're they're viewing the house on to capture it so that when they deliver the report to the client, whether it's a lender or a private individual, that there's some digital reference, visual digital reference to the interior of the home. And I think this is going to play out significantly after this aftermath, in the aftermath

of all this. So so that makes sense for appraisals, and that certainly makes sense to be a little more virtual and efficient on closings. But I keep coming back to the issue of how every piece of property is unique. Photographs don't really capture a neighborhood, the unique view of a given property, the feel you get when you walk

into certain houses. There are certain certain architecture that just the right energy, the right vibe, and sometimes you walk into a house that looks spectacular online and in your immediately recoil is just something off about everything. So the smell you know, which you know we can run into two or you know your next to um, you know, you have a property out the rural area and there's a tremendous odor from the farm coming you know, coming

from your neighbor. I mean, there's all kinds of problems with you know, going completely virtual. That's why I'm very skeptical, uh, that that it replaces the in person experience. And I know the appraisal industry itself is very worried that banking will just go all virtual and then worry about the consequences later in terms of collateral valuation UM. And you know that I'm not that worried about that, but I certainly is a concern. And for homeowners, I just have

a hard time processing. And maybe that's just me of of you know, a first time buyer just buying something online. You know, that's challenge enough with car doing it the first time. UM. But you know, the house, I think is is a little bit more. There's more intangible. There can be little doubt about that. And we haven't even talked about inspections where someone literally has to come and look at the foundation, look at the roof, look at

the plumbing, the electrical system, or all the machinery. How can you do possibly do that virtually you can't, or anything you do is something less than an inspection. And the something less could be a little less or dramatically less. And and that's the problem. Um. You know, one of the things that if, if, the if, this carries on, Um, this cry this carries on longer than anybody thinks. And we have a severe economic you know, meltdown or whatever

you want to call it going forward. Uh, there's gonna be a tremendous amount of clean up on the other side in terms of foreclosures and workouts, and you know, properties that shouldn't have been purchased for what they were purchased because the property is not what it appears. You know, I think that there's a lot of concern about that. I just have to share a funny story with you. You've been to my house. I've been here almost six years.

When when we first saw this house online. There's a whole long story I'll spare everybody, but I had set up a Zillo alert. I want a contemporary house either near the water or near the woods, with the master bedroom on the ground floor, the laund room on the ground floor, and I wanted it to be contemporary. And I kept on getting these crazy thirty million all our mansions in East Hampton. To find a regular house like

that was rare. Lo and behold, our house in Locust Valley pops up, and we go to see the house, and every time we go to visit the house, the owner is cooking something. They're frying bacon there, they're they're baking muffins or cookies. I mean, we visited the house seven or eight times, and no matter what time of the night or day, stuff was being cooked. And we get the engineers report and it says part of the roof has been replaced. It's a contemporary house with a

flat roof. Of course, flat roofs are big pain in the neck. And uh, the engineer says, this was repaired. You should and the house is thirty years old, you should plan on replacing the roof sooner rather than later, because it's gonna be a problem. Lo and behold, we moved into the house and within a week you could smell the mold. You could smell mold is really the wrong word. You could smell the dampness from the leaking roof, and fast forward three years later we replaced the entire

roof of the house. It was not inexpensive. The smell was the frying bacon. That was the hint they were

covering something up. Well. I I had an experience probably UH probably ten years ago in a litigation where the retail UH store This is a condominium in Manhattan, and the retail store at at the street level was a Starbucks and they had Landhord had incorrectly vented UH the exhaust FM from the store and it was getting It was the smell of like Jamaican blue Mountain um Bold coffee was of the air in the apartment right above it.

You could you could hardly think of anything else and imagine trying to litigate that virtually, It's it would be impossible. I want to talk a little bit about what the marketplace is going to look like after UM we get through this coronavirus. I'm assuming one day this will pass and things will start getting back to normal. What is that gonna look like? And how dependent is it on how severe and long lasting our lockdown is? So I think the future is highly dependent on how long the

lockdown lasts. You can imagine if the longer that the lockdown lasts, the more damage to our economy occurs, even with the stimulus money that's you know, coming coming out. The problem is that if this runs very long, you're going to have a much higher unemployment rate, and in theory then that cuts down on potential purchasers for properties.

You know, one of the if it's a short window and you know, there's a greater probability that you know, the market recovers quickly, but we have no way of knowing, and they're literally at this moment, there is virtually no data that reflects you know, in a in a large you know, something that's available and clean and speaks to the whole market. So longer the crisis the damage, the bigger the hit to the housing market. Let's let's take

a reasonable scenario. Let's say the lockdown is two months and sometime by the middle of May, we start crawling out from our shelter in place and social distancing and things get back to normal more or less. What sort of real estate market are we looking at? Then? Do we resume the spring selling season or do we lose half the season? What? What happens. Then I think then at that point the spring selling season has essentially passed us by, because I don't think it's the market is

going to snap up like you know, flipping a switch. Um. What you might see is the market being pushed to the fall. You know. I think of an annual housing market. I always describe it as a two hump camel spring and fall, and the spring humping much larger than the fall hump. We could very well see a big fall of you know, a large release of pent up demand

if unemployment doesn't surge out of control. I mean, that's really you know, the the liquidity of being able to make payments on mortgages and all that is really kind of determines that. Um. The other thing is, I think, what this what is maybe a silver lining in the sense that in markets that have been deteriorating over the last couple of years, and that's certainly excuse to the higher end, higher end markets and not uh sort of lower priced or mid range type markets, um, higher end markets.

You the problem has been is that sellers have been anchored to you know, the market conditions several years ago. Uh, And this, in my view would clearly accelerate their their ability to see the market as it is as opposed to the way it was. And the reason I see that is, um. You know, anytime you have an economic van of milestone, UM, the consumer starts to you know, you're unable to look before the milestone occurred at some sort of basis of rationale for you know, what you

think your home is today? Um. And I think there's gonna be a lot of that going on. UM. And I think, my gut if we're talking about May, and that feels incredibly optimistic, just in the context of the virus and how it will spread. It seems like the earliest would be something more in the lines of July and you mentioned the tendency of sellers to be behind the market. We saw something very similar, uh in the early to mid two thousands as we headed into the

financial crisis. Sellers always seem to be remembering the peak of the market, but they don't seem to recall the recent drop. Is that just a persistent quality of real estate that that people want to get the top and and they not paying attention to what is actually taking place within their local market, especially in a multi family market. You know, in the city where you might have properties

in the same unit line. You know you own fifteen, you know twenty a sold three years ago for X, so you want to be five or ten percent more. This is very common. Even though I missed, you know that there was some sort of you know, downturn in the market there. You know, they're looking at public record

and saying, well, that's the last sale. And the problem with that is that it takes seller that's anchored to the wrong number UM one to two years at least in my observation, to d couple or d anchor from that incorrect number not feel like they left money on

the table at the closing. And now we have and we and I think that's one of the reasons why in New York anyway, we saw this upticking sentiment in January, because the sellers just went through two difficult years in the market with all the new taxes, and this seems to be a fresh start entering. And now that's that's gone. So you mentioned taxes as suppressing um the real estate market the past couple of years. What about this two

trillion dollar bail out. I keep reading about all of these goodies sprinkled throughout that are going to help either real estate developers or real estate investors. But what's in this bailout package for the benefit of real estate. Well, I think there's UH. They'll be hopefully from what I

can tell, will be some relief for landlords. Um. The problem with UH, and this is something I'm not clear is in the bailout is that a large portion of the real estate community are independent contractors and they therefore not eligible for unemployment. So this could be a real problem. I think anything coming into the economy is going to

be helpful. I just don't know if it's soon enough to help small, you know, small independent contractors that are going to really be challenged financially over the decks two, three, four months, Jonathan, Who are independent contractors? Do you mean real estate at agents, appraisers and sectors or agents, real

estate and age, sent home inspectors. A large the majority of appraisers, people that are servicing their real estate industry, of vast majority, you know, with the exception of executives, tend to be independent contractors. So they're very much at risk, UM in going forward without some sort of help. I know there have been attempts to lobby to put this in but I'm not clear whether that's included in this

UH stimulus package. Quite interesting. So so based on without guessing whether this last till May or July or beyond that, just based on what you've seen January February March, what is the next thirty to ninety days in the real

estate market look like. Well, first of all, I think all the research that's going to them out at the end of the you know, the completion of the first quarter, it's not going to be very reflective of the conditions that have actually changed on the ground because of the lag because this crisis is measured in days, not weeks or months and UH and so so I think there'll be somewhat of a false positive in terms of you know,

data that that describes the conditions of the market. I think what you're gonna have is, AH, this period of act in activity is going to see listings removed from the market. We're going to have a tremendous amount of pent up demand built by those that build up that we're intending to buy, that you know, are not worried

about their job. And assuming that rates stay low, you know, you could see some sort of release of any any kind small, medium, large, but some sort of release once the quote unquote coast is clear the other there's been.

It's funny. I I'm on my blog. I wrote sort of a list of things that you might change after the crisis is over, and one of them is I would think that everybody that's cooped up in an apartment or a house UH is starting to think about something a larger space in the future, whether they carried out or not. H It certainly UH provides a little oxygen for the real estate community to think about the future.

We were just having that very identical conversation about how your house is laid out and whether or not the structure of your home is going to lead to either a baby boom or a divorce tsunami after this is over. If you're in a sort of compact space that's on a small footprint and and rises off of that, there's

really nowhere in the house to hide. If you're on sort of a longer piece of design with a little more um acreage in your backyard, well you have a place you can go and escape from your significant other, just just for a break, for a little bit. I'm really gonna I'm really curious to see how our divorce infrastructure is set up and what sort of a wave of all Right, that was thirty years of marriage in three months. I'm out. I wonder what sort of stuff

we're gonna see following that. I know you have a large house with a lot of places you can hide. You know, my house is set up like a railroad flat, so it's much longer than it is wide or deep. So if we're on the opposite ends of the house, you can't even yell to each other, you can't even hear anything. That's actually what my my wife and I

are in that same arrangement. We both are home offices, are on opposite ends the house, and then we meet in the middle in the kitchen and have meals together. I mean, I'm simplifying it a bit, but but it it kind of works that we've been doing the same thing. We We try and meet every day for breakfast today thirty, lunch for twelve thirty, Happy hour at five thirty, and then dinner at six thirty, and and depending on the weather, will either take the dogs out for walk the two

of us. Last week it was sixty five degrees. I took the convertible out for ride we went for. So we're keeping a little bit of a schedule with both alone time and together time. And uh, I've been talking to friends who have some of my employees who recently got married. And man, let me tell you, this is a baptism of fire. It's there's one thing to have a date that lasts a couple of hours. It's another thing to have a date that starts in March and ends in July. I mean, you really find out if

you're compatible. Some going to really learn about their partners and uh, and we actually, you know, in all seriousness, we're expecting um, just from feedback. We have a large part of our practice are uh legal support services. The minority, you know, the probably about the court of our business really is relating to you know, mortgage type work refunds, but we do a tremendous amount of matrimonial type UH litigation. And uh, the attorneys are getting ready because this could

be a phenomenon. And and I think I agree with your you know about the birth rate. Uh, you know, we could have a baby boom when we have to figure out what to call the next generation the pandemic boom. Well, Jonathan, thank you so much for spending some time with us. Is there is there anything else we haven't touched upon that you think is worth bringing to our listeners attention.

I don't think so. I think I think the only you know, sort of final point is that right now we don't really know that much about the future of the housing market. Other than that, we don't know that much about the future of the housing market, and this really is developing a story we have been speaking with Jonathan Miller, President and CEO of Miller Samuel. If you enjoyed this conversation, be sure and come back and check out the podcast extras, where we keep the tape rolling

and continue discussing all things real estate. You can find that on Apple, iTunes, Spotify, Overcast, Stitcher, wherever your finer podcasts are sold. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. I would be remiss if I did not thank the crafts staff that helps put these conversations together each week. Charlie Bolmer is my audio engineer, Michael Boyle is my producer.

Michael Batnick is my head of research. I'm Barry Ritolts, You've been listening to Masters and Business on Bloomberg Radio.