Felix Learns What A Condo Is

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Felix Salmon: Hello and welcome to the Felix lens. What a condo is! Episode of Slate Money, Your Guide to the Business and Finance News of the Week. I’m Felix Salmon of Axios. I’m here with Elizabeth Spiers. Hello. I’m here with Emily Peck. Also, Max is.

Emily Peck: High.

Felix Salmon: And we are here with Jonathan Miller. Jonathan, welcome. And tell us who you are.

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Speaker 3: So glad to be here. I am an appraiser and market analyst based in New York that spends way too much time looking at housing numbers.

Felix Salmon: And so when you say market analysts, you’re not talking about stocks, you’re not talking about bonds, you’re talking about the things that we live in now.

Speaker 3: I’m talking about housing market analysts. And every summer I teach market analysis at Columbia.

Felix Salmon: So this is what we’re diving into today. We have a whole episode devoted to the housing market. We’re going to talk about mortgage rates. We’re going to talk about Yimby’s and NIMBYs. We’re going to talk about my favorite subject, which is why do people want so much space? And yes, we are going to talk about this weird, terminal, illogical bizarreness that the Americans have that according to, like whether you rent or own, it’s a different word for the same thing. It’s all coming up on Slate Money. So, Jonathan, we have so much to talk about, but we really do need to start with mortgage rates, because one of my favorite things to write about for as long as I’ve been a finance blogger 20 plus years has been this perennial question of what happened. What is the relationship between the house prices and mortgage rates? Do house prices really go down when mortgage rates go up? Do you have an opinion on this?

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Speaker 3: Absolutely. One of the fallacies about the trajectory of home prices is this, say, an external event like rate spike sales activity drops like we’re going through now and inventory rises. And so therefore prices are assumed to fall immediately. And what I’ve learned throughout my career is that prices don’t fall immediately or, you know, correct immediately. And there’s a saying in real estate that prices are sticky on the downside because of the seller doesn’t have to sell and they don’t get their price, they don’t sell. And so there’s usually, you know, anywhere from a 12 to 24 month gap. You know, this situation we’re in now is a little weird. But prices, you know, I believe over the last bunch of recessions generally haven’t come down except for maybe the financial crisis and one other.

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Felix Salmon: The 2008 crisis was exceptional in a lot of ways. And it was really led by real estate and people buying houses that they sort of had to sell because they were being foreclosed on.

Speaker 3: Right. Because they they had a pulse, right, to get back in the first place.

Felix Salmon: But for most people, selling a house is less of a necessity. Right? If you feel that you can’t get a good price, you just don’t sell it.

Emily Peck: The key right now, The Wall Street Journal calls it the golden handcuffs of the low mortgage rates that most people have now. I think it’s like eight out of ten people who have a 30 year mortgage are paying less than five, maybe even less than 4%. So no one wants to sell and walk away from really low a really low mortgage rate and then have to face one that’s like twice as much. So everyone, just if you.

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Felix Salmon: Bought $1,000,000 house at a two and a half percent mortgage, which was really quite common not that long ago, and now you think to yourself, Oh, I would like to move, you know, over a town and I’ll sell my million dollar house and buy a different million dollar house. Like in principle, according to capitalism, if you buy if you sell something worth $1,000,000 and buy something worth $1,000,000, you should be like flat on the deal and just have to pay transaction costs. But in practice, you know, your mortgage rate is going to double and the amount of money that you have to pay for your house is going to be twice as much now as it, you know, is twice as much on a new place just because the mortgage is going up so much. And why would anyone want to do that?

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Speaker 3: Well, I think there’s another calculus, too, is that because rates, in my view, were too low for too long, that million dollar house in the next town is now a million for. So on top of the million for with rates having doubled since the end of December, that’s a much more difficult financial decision.

Felix Salmon: Although presumably like your own house is now I’m only in for as well. Right. So you have more proceeds from selling your own place.

Speaker 3: Yeah, that’s the theory. But you know, the problem I think we’re going to be facing is, well, it’s not a problem. Actually. I think about it is home equity is like at record levels. Right. So we’re not looking at some weird financial market meltdown, but people are still going to stick with the old house until, you know, again, selling prices are sticky On the downside, you’re not going to be seeing, you know, discounting or rapidly discounted home prices in the foreseeable future. I don’t think.

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Felix Salmon: So. What this says to me is that for the next 12 to 24 months, we’re just going to see much less volume, much less turnover in the residential real estate market. People are going to be selling less. People are going to be buying less. Is that bad? For me? It’s like this is one of my beefs with home ownership in general. One of the reasons I think that home ownership is massively overrated on a societal level is that people should be able to move to where they want to live, and home ownership is very sticky, especially when prices go down and it causes people to not move and to be unhappy, to be stuck in some place where they don’t want to live. And that’s a bad thing.

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Speaker 3: Right? I think, you know, mobility is continuing to tick down. And here’s one more reason that people are less mobile is that they are you know, they love their mortgage rate and it makes it harder to move. That seems sort of improbable maybe two or three years ago that there would be such a massive sort of change in thinking about loving your rate. But here we are.

Speaker 4: Also, Jonathan, you just bought a house. How did all of those factor into your decisions about timing and other. Iterations.

Speaker 3: Well, I was right on the moment that the Fed was about to raise by 50 basis points. You know, you could see it coming. We my wife and I had been looking at we wanted half the size and twice the land, basically, and a pool to entice our grandkids to come over. And we actually just before the Fed move, we beat 30 other parties bidding on the house that we went out. Wow.

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Felix Salmon: You so you won a bidding war against three other bidders.

Speaker 3: And I only paid 36% above the asking.

Emily Peck: Oh.

Felix Salmon: And now you feel like that was smart because you got such a great deal on the mortgage?

Speaker 3: Absolutely. In fact, this is something that I think a lot of people don’t know, especially in sort of the, you know, million and up financing and the wealth management world is that by pivoting to the lender for my financial you’re putting money in the bank. My rate at the time the going rate was around five and a quarter and my mortgage is less than 4.1%. There’s a lot of that going on in sort of wealth management where if you bank with a lender, it, you know, they essentially buy down your rate, which doesn’t work for the whole world, but work for us.

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Felix Salmon: Basically, it’s a relationship thing that if you have a bunch of assets with a certain bank, then they’ll lend you money at a lower rate.

Speaker 3: Correct.

Emily Peck: And do they hold on to that debt or do they sell it?

Speaker 3: And I’m pretty sure they sell it, but they service it. This house sustained it. Huh. And it’s pretty common, at least in, you know, the banks that they interact with in New York wealth management type groups.

Felix Salmon: So this is one of the questions which I wanted to ask you as someone who just downsized. One of the hot parts of the market and I’m probably the hottest part of the market over the past decade or so has been the really, really top end of the market, which if you just look at the New York City skyline, you can see how it’s changed, been transformed by the addition of crazy new apartment buildings which sell for $10,000 a square foot. And one of the interesting things about those buildings and the high end of the market in general is the seemingly bottomless demand on the part of rich people to have enormous numbers of enormous places to live.

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Felix Salmon: And I wanted to ask you, does this make sense to you? A friend of mine is an architect who just built a massive house for a very rich client. And he’s like, If I ever build a house for myself, it’s going to be tiny. I just don’t understand how, like what the utility is in rattling around an enormous house, let alone rattling around like four or five enormous houses dotted around the globe.

Speaker 3: Right. So a developer that was still around. But when I first moved to New York in the mid-eighties, he coined the term in New York magazine, weenie waving. And it’s parking money, you know, holding it or capital preservation. I was calling it during the sort of the you know, the initial boom of this was people had the world’s most expensive bank safety deposit boxes and they were putting their artwork and valuables in it and hardly ever visiting it. Right. That was a big part of it.

Speaker 3: I will point out that after the financial crisis, there was a massive amount of overbuilding of super luxury, especially in market in many markets. Manhattan was sort of the poster child for that to the point where pre-pandemic we were at nine year sell out, meaning it would take nine years to sell out all the unsold supply. What’s interesting about the pandemic is now there’s about three and a half years supply that it’s been sold off. We can talk about why, but the idea is, is that there was a tremendous surge in luxury sales activity during the pandemic era, which was an inversion in activity because lower wage earners are much more economically punished by the lockdown and pandemic itself.

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Felix Salmon: You can see that when you’re spending more time at home, that’s the point at which you start wanting more space at home.

Speaker 3: Yeah.

Speaker 3: And I can also point out that as I’m in the real estate appraisal business, we are doing lots of divorce litigation now. So there you have it.

Emily Peck: What do you mean? Wait? Divorce and appraisal. So you’re going and people are putting your stuff.

Felix Salmon: If you’re stuck with a very small place, that’s the recipe for divorce right there. And then when you divorce, you have to sell the house.

Emily Peck: And that’s where Jonathan comes in.

Speaker 3: Exactly. Absolutely. As a as a neutral. And the other stat I had related to that, at least in my own firm, is that about 90% of the divorce appraisals we do are an apartment that was just renovated.

Speaker 4: Oh, that’s brutal.

Speaker 3: Oh, wow. So be careful and rehab. Your apartment.

Felix Salmon: Was. Going on there. What’s what’s the story? People people think they’re unhappy and they think that they can make themselves happy by renovating their apartment. It turns out it’s actually their marriage.

Speaker 3: That’s my armchair psychologist sort of rationale, I agree with you.

Emily Peck: Is that, like people have a kid to save the marriage and sometimes instead they, like, renovate their apartment to save the marriage.

Speaker 3: Absolutely.

Speaker 4: And then they’re renovations and they’re being stressful all by themselves.

Speaker 3: Right. Which creates just like the additional stress.

Felix Salmon: So talking about.

Emily Peck: You when you come in the apartment is worth more because it’s.

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Felix Salmon: So that’s what I was going to ask. Like, to what degree do apartment renovations increase the value of an apartment?

Speaker 3: So it really depends and I hate that answer, but it depends on the market. So, for example, you can have periods like that are were really slow like the early nineties recession where you might be lucky to get $0.50 on the dollar for what you spend. And typically the primary impact areas are would be kitchen bathrooms and then other periods where there’s a massive premium for white box. And actually during the pandemic there was a massive premium because of strict building rules for letting contractors in during the pandemic, things like that. So it does vary. Typically, you know, it can add 20% or more. You know, we go in places where, you know, it’s like bare side, but it’s a post-war two bedroom on a low floor with a view like it’s sort of money wasted.

Felix Salmon: But basically, it sounds to me like in fast markets, you can make money by doing a renovation fast and slow markets, you lose money. So right now, given that it’s a slow market, probably a renovation isn’t going to improve the value of your apartment that much.

Speaker 3: I don’t think you get the disproportionate benefit that you saw during the pandemic, because while COVID is here, the intensity is not there in terms of building access, which was a huge issue for us as appraisers and just the public in general in the real estate market during the pandemic.

Emily Peck: Wait, is the New York City market that’s sort of, I think, your bread and butter, Jonathan, is it slowed down in homebuying? I know we talked about apartments recently, so it’s not moving.

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Speaker 3: No, no, it’s it’s not that it’s not moving. It’s just not moving in the same way that it was for the last couple of years. You know, one of the problems, you know, so we look at things like new signed contracts right now and compared to a year ago. And the problem with year over year is 2021 was this insane supercharged market. So it looks like contracts are down 30% if you compare them against pre-pandemic sort of, you know, August of 19 contracts are down about 12%. So it is things are slower. It’s just the reporting of the information is overly negative to what’s actually happening on the ground.

Felix Salmon: And places are right. People are rich. The stock market is up. And right now, if you want to buy some air, you would still need to pay more than you would have done pre-pandemic, even though people say that people don’t want to live in New York anymore. Yeah.

Speaker 3: So prices are a little nominally ahead of pre-pandemic New York’s resurgence or boom. The city itself was delayed by about nine months. What we saw in the suburbs once the lockdown ended, that the beginning of summer of 2020, it was off to the races. We saw, you know, 40% price growth in the city. It didn’t really wake up until early 2021 when vaccine adoption was being ramped up because city the city was perceived as sort of ground zero globally, I think, in terms of safety. And then when rates spiked, you know, in the spring, the air was let out of the market, not maybe as severely, but still, you know, the market has downshifted for sure.

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Felix Salmon: Is that more or less in line with the country as a whole, or is it for a while there it felt like New York and San Francisco were like the big outliers and everywhere else in America was very different. But now it sounds like just me, you know, reading the press, like pretty much across America, you’re seeing the same kind of the rates of the same everywhere. The slowdown is the same everywhere.

Speaker 3: I think that’s fair. I cover about 40 different housing markets, Southern California being one of my favorites because in the second quarter, bidding wars comprised 65% of all the closings in the second quarter, which was sort of insane. And Manhattan was only 9% because Manhattan was late to the party. You know, inventory was obliterated across the U.S. Manhattan didn’t quite have the time because it got a late start. But yes, generally the same thing, two different extremes.

Felix Salmon: The big question, which I wanted to ask you is if I thought of like. Hipster urbanists question the gentrification question. There’s basically these two camps fighting it out very vehemently, and they’re both convinced the other side is complete morons. And the one side says if you build a bunch of luxury apartments in a neighborhood that is going to gentrify that neighborhood, it’s going to make everything in that neighborhood more expensive. And the other side says, Don’t you understand supply and demand? If you build a bunch of luxury apartments in the neighborhood, that means that the people who want luxury apartments will move in there. All of the existing apartments will then become more affordable to the people who want to live there. And prices will actually go overall will go down rather than up, as least if you exclude the newbuilds. Which one is true?

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Emily Peck: It’s obvious what the answer is.

Speaker 3: Well, maybe we should let Emily answer.

Felix Salmon: Yeah.

Speaker 3: Wrong.

Felix Salmon: What is?

Emily Peck: The organization actually has an answer supported by facts.

Felix Salmon: What is the obvious answer?

Emily Peck: The obvious answer is prices go up for everything. If more rich people move into your neighborhood and there are more luxury in aggregate, everything is more expensive. Even the inventory that is less desirable becomes more desirable.

Speaker 3: Let me add clarification, so I don’t totally disagree with that point. But so the way to think of it is and I’m going to exaggerate to make my point, when Michael Dell bought a $100 million condo in Manhattan at 157 face in Central Park, we literally my appraisers, we literally had feedback from someone on the fifth floor of a tenement walkup that overprice their listing and they said, well, someone’s going to pay 100 million in New York, and therefore my apartment’s worth, you know, at least 20% more, which is absolutely not true.

Speaker 3: So I’m exaggerating, but the way that I think you should think about it and the reason it feels more expensive is that I think it doesn’t necessarily make other apartments a lot more expensive. It might help because higher end retail comes in and so the perception of the market might change a little bit. But I don’t think it’s this panacea that makes everything more expensive in terms of other types of housing. Just because you’re building super luxury or something higher into the market, I think it has upward influence, but it doesn’t dramatically change pricing in the neighborhood.

Felix Salmon: So but the NIMBYs are wrong. Basically. It doesn’t have downward influence. It’s not like supply and demand.

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Emily Peck: If you do not have if.

Felix Salmon: You increase the supply of housing, then you should thereby decrease the price of housing.

Speaker 3: The problem, at least in most urban markets, is when you increase supply of housing, you’re actually increasing the supply of luxury or higher in housing because land costs are so high that it’s cost prohibitive to build. Affordable, which I would define the word affordable is middle class housing.

Felix Salmon: Right?

Speaker 3: But it’s impossible that.

Felix Salmon: The existing housing stock then becomes the affordable housing stock.

Speaker 3: Correct.

Felix Salmon: Correct. But you’re saying that even that doesn’t ever go down in value?

Speaker 3: Well, it doesn’t go down in value because you’re building luxury housing in the neighborhood. It’s more of the opposite.

Felix Salmon: Right. It has always been peculiar to me, the way for like zoning reasons, all of these ultra luxury towers went up on 57th Street, which as a New York City appraiser, you will presumably agree with me because I’m right on everything. The 57th Street, sort of bit of midtown was always kind of a crappy, not particularly desirable place to live. Right. And like your normal apartment, if you could find one in some kind of like building on 57th Street would not have been particularly expensive by New York standards and presumably go up that much.

Speaker 3: So that was true pre billionaire’s row, right? So the conversions that we saw, you know, rental to co-op conversions and even modest condominium development, it was not seen as, you know, an Uber luxury location. In the seventies and early eighties, you had some of the glass towers like Olympic Tower Museum Tower go up and they certainly were higher priced. It was sort of like a mini billionaire’s row sort of phenomenon.

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Speaker 3: To the listeners that aren’t familiar with Billionaire’s Row, it’s basically in the proximity of 57th Street in the center of Midtown Manhattan. We have these super tall buildings. And one of the things that has enabled this phenomenon, I think primarily is because technology and building materials have allowed one story buildings when plus or -50 stories was the de facto sort of peak. And the value is then all about the views and the 360 degree views. And you’re clearing most of the other 50 story buildings. That’s where the money is. And it’s also enabled development to build in really small footprints like crazy thin buildings that are being created. I’d always be worried about living out the top floor during a hurricane.

Felix Salmon: My take on this, by the way, is that if you’re in that class of people. Who is buying, you know, $100 million apartments. You’re used to sleeping on yachts, so the swaying isn’t going to bother you so much.

Speaker 3: You know that that is a deep pull there. I prefer to use that.

Emily Peck: Wait. So. Okay. So in a crowded urban environment, adding more expensive luxury homes to a neighborhood doesn’t bring down values. What about in the suburbs where there is tons of space to build more units of different kinds and types where the NIMBYism is the strongest? Right. And the argument is always that will bring down our property.

Felix Salmon: Value, right? The NIMBYs. Right. With the NIMBYs.

Speaker 3: I think the NIMBYs are generally wrong.

Felix Salmon: So the numbers are wrong in the cities and the NIMBY, I think everywhere in the suburbs, everyone.

Emily Peck: Everybody is wrong.

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Speaker 3: Yeah. I actually in the town I used to live in, I joined the whatever it was, representative town member. I was an elected official for two years and I did it solely because a huge RI was developing the only undeveloped sort of open space left in the town that was dominated by single family housing. And the concern wasn’t that multifamily was going to bring values down. The concern was that they were wildly underestimating how many children would go into the school system, and they were estimating in this huge complex, like 50 kids would go in and end up being like 275, which then becomes a tax burden for the town.

Emily Peck: So but the people pay tax. Yes.

Felix Salmon: They do.

Speaker 3: But they do. But the assessment on the property, the way it was structured, wasn’t enough to offset the expense without raising taxes forever.

Felix Salmon: So but just tell us what happened to property values when this big rate came in and built all of this multi-family housing? Did that have any deleterious effect on all of the NIMBYs precious housing equity?

Speaker 3: No, I mean, not in my opinion. Living there and living in three different houses in 30 years, I didn’t see it.

Felix Salmon: Even the hypothetical higher property tax is to go to pay for bigger schools. Even that wouldn’t bring property prices down.

Speaker 3: No, because actually in fairness, the taxes in our town relative to, say, Westchester County were about a third of Westchester. I was in Fairfield County, so we were already low, pretty low to begin with. Maybe I’m generalizing too much, but what I saw was that I thought it was neutral. I didn’t think it made any difference. It was more the other issues, concern about taxes, concern about, you know, could we use this as a park? That sort of thing.

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Felix Salmon: Is there anything that brings prices down if building new construction doesn’t bring prices down? If I’m someone who cares about affordability and I want house prices to come back down into the realm of rationally sensible, is that anything that has been shown to have that effect beyond like massive crime waves?

Speaker 3: I don’t know. Maybe I’m missing that for my education, but I, like we had a high school. My kids played sports and we couldn’t have a light on on the field at night because the neighborhood next to it said all the property values would plummet. And it didn’t happen. But it was highly political. And I remember at the town meetings, you know, the people would begin their sentences with the time of wine and roses is over. We have to deal with these lights, you know, this sort of thing. So it’s just highly emotional.

Felix Salmon: Well, the other thing, presumably, if you know, going back to where we started on the mortgage rates, high mortgage rates for more than a couple of years is something that brings prices down. I remember, you know, if there was ever a cheap time to buy in New York City, you’d probably in the mid-nineties, if rates have been relatively high for a while and have stayed high and they’re not going anywhere, that is the one thing that can finally maybe bring prices down.

Speaker 3: The way I look at it is it keeps them from rising that their stock I mean, one of the reasons you could argue that this is a stretch, but interest rates when they’re high, it might also suggest that the economy is in pretty good shape. Right. They’re trying to offset inflation. So I don’t know. I don’t see this. You know, hey, if we keep rates high, we’re going to create affordable housing. You know, that’s yeah, I just don’t see that.

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Felix Salmon: What about boom is dying like when all the boomers die off and hey, I know. And and all those houses finally flood the market. Could that do it?

Speaker 3: All right. I think it could help.

Speaker 4: Alex is hoping for a crime wave and a generational die off.

Speaker 3: Right, right, right. So the problem with a lot of the boomer housing stock in the suburbs is it’s outdated. The quality of the stock is sort of not kept up with the times. Every year it’s getting older. That’s certainly possible. You know, you can see that at the high end in the suburbs. You know that a lot of these what your once grand homes are being torn down. You know, they’re tear down for new construction.

Felix Salmon: So anytime that people are tearing down homes for new construction, that’s like a bullish signal, right? That means there’s money to be made.

Speaker 3: Yeah, it’s, you know, in appraisal terminology, the highest and best use of the site the land is, you know, when properties appreciate most of that appreciation is the land value. It’s not the house improvements like a house depreciate and then you constantly struggle to upgrade them or, you know, improve them. It’s the land that is truly appreciating. And I don’t think most people see it that way, but that’s actually what it is. So the question then becomes, in the suburbs, it’s more about the land that becomes available then about like all these houses, you know, because these houses, many are just really updated.

Emily Peck: Should we talk about rents? Because rents.

Felix Salmon: Yeah, let’s talk about rents because the rents. I believe that to them. High.

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Speaker 3: Yeah, I’ve heard that before somewhere. Yeah. Actually we just published our Douglas Salmon research for the New York City Rental Market and Manhattan rents for the first time. After six months, the seventh month, they did not set a new high. They are only the second highest in history. So actually, what we’ve seen so it’s about on the average is a little over 5200 and the median is just over 4000, which is roughly double the national. A little bit more than double the national. I think the national is like 1800.

Speaker 3: But what’s interesting about it is that there was greater rent growth when the Fed started ratcheting up mortgage rates. And this is something I need you to help me understand, because the Fed is raising rates to slow down the economy. You know, the baseball bat, yeah, they’re slowing down the purchase market. That’s clear. Sales are slowing, prices aren’t, but are. Maybe they’re not rising as much, but sales are slowing and all that’s done is pushed would be potential buyers, many of them, into the rental market, which is already tight. So it’s given more of a foundation to a higher rental environment. And owners equivalent rent is the basis of the 30% of CPI. So isn’t this like some weird feedback loop that conveys the wrong thing to the Fed?

Felix Salmon: Yeah. And and is equivalent rent is a large part of CPI. I’m not sure it’s a large part of what the Fed is worried about because as Emily was saying, if you have a fixed rate mortgage, then, you know, if rents in your neighborhood go up, that doesn’t in any way increase your housing costs. And so, you know, you don’t experience inflation. The only the only people who are experiencing inflation, that is, you know, subaltern renters.

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Felix Salmon: One of the things that has always astonished me about property in the United States is the incredible class distinction between owning and renting property to the point at which they actually have different names in most of the country. I just I just learned this a few months ago, but apparently in most of the country, an apartment that you don’t own is called an apartment, but an apartment that you do own is called a condo. And they have like completely different names. And you’d never use one word to refer to the other. And so, yeah, the rental, the amount the rent is pay and rent is, you know, when you have a 65% homeownership rate or whatever it is, you know that 35% of households who don’t own tend to be in the bottom half of the income spectrum.

Speaker 4: Going back to, you know, the New York City situation, there’s a good piece in The Times today that Jonathan was quoted in that talked about this because they’re in New York City. Two out of every three households are.

Felix Salmon: Writers right now. You can read one exception to the homeownership trend for sure.

Speaker 3: Actually, if you look at rent versus own, most urban markets are renters. As a larger group, like 2 to 1 over ownership. And then in the suburbs, it’s the inverse, right? And then nationally it’s still the inverse. So cities are much more known for renting, which is interesting to me because I’m like this fan of old time white detective radio podcasts, and I listen and every story everybody’s renting, like even the wealthy. Like there’s no ownership in any of the dialogue ever, never heard of it. And yet, you know, in the suburbs, that’s the.

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Felix Salmon: American is Germany, I tell you.

Speaker 4: Do you think that’s because renting has become more stigmatized over the years?

Speaker 3: I actually do. Or at least I mean, I’ve been a homeowner for, you know, 30 years or so. But when I first moved to Connecticut, there was absolutely where people would say, oh, you don’t own I mean, it was so constant, you could feel it a stigma. And I thought that was sad.

Felix Salmon: It strikes me that a lot of this is related to schools. The you know, the schools that are funded in large part by property taxes, for reasons I don’t entirely understand, seem to be better funded in neighborhoods that are dominated by owner occupied housing. And if you have a neighborhood dominated by multifamily housing, which is mostly rented, the property taxes are lower, which means the schools are lower quality and the families who can afford it don’t want to live there because they want to send their kids to better schools.

Emily Peck: Well, to do with racism and redlining, right? I mean.

Felix Salmon: Is there. The racial aspect of that. Felix I mean.

Speaker 4: Felix just learned what a condo is.

Emily Peck: Yeah, I mean, I mean, the suburbs, the American suburbs were created as sort of like a white haven and, you know, black families couldn’t get mortgages.

Speaker 3: Their first deed restrictions.

Emily Peck: Federal policy up.

Speaker 3: Until the banks.

Emily Peck: Up until the six years. And then even when there was a law put in place, you know, it was still very hard. And the notion of owning became sort of like a signifier of, I guess, white privilege, you would say. Right. I mean, and then the people left renting were the people of color with worse schools. And it was sort of like this whole thing, which pushed a lot of his white families out of the cities. And maybe at that point, property values in the cities did fall.

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Felix Salmon: I think there was that time where you had, you know, where city centers, where these terrible crime ridden urban areas and the white people all left for the safety of the suburbs and the property values went negative. Yeah, there was a time in New York, I think, in the seventies where there were apartments, you know, pretty swanky apartments on, you know, Lexington Avenue, whatever, that had negative value because their monthly maintenance costs were higher than anyone was willing to pay.

Speaker 3: I did grow up in New York. I came here in the mid-eighties. But if you ever watch Paul Newman’s Fort Apache, the Bronx, unbelievable visuals, which were true at the time. And when we started our company in the mid-eighties, the East Village was the same. I mean, it was tumble down empty lots. It was gangs. I mean, it was pretty intense. I remember. New condo conversion, which was pricey at the time, and the front door was spray painted by yuppie scum.

Felix Salmon: Was that the crystal Dora crusader house?

Speaker 3: Very good.

Felix Salmon: Eye. So I used to be on the board of the Lower East Side people Federal Credit Union on the corner of Third Avenue. Be for you New Yorkers out there, you know where that is. But that became a credit union in 1984. It was the only bank in the neighborhood. It was the only bank for literally more than a while around it was Manufacturers Hanover. Manufacturers Hanover decided to close because it was a miserable, horrible place to have a bank. So a bunch of neighbors bought the building, which is owned by Manny Henny, and it’s a six story building with like a dozen or so apartments and the bank on the ground floor, and they basically got the building for free and squatting. Well, no. And they turned and they turned it into what’s known as a rental HFC. So it became affordable housing plus credit union. But it was all possible because the value of the real estate was basically zero zero.

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Speaker 3: Yeah, yeah. Actually a friend of mine that I went to high school with in Maryland where I grew up, he was one of those people that he basically squatted, acquired a building for nothing, and then he doesn’t ever have to work again. Oh, pretty wild. Now, you’d never recognize these fellows shouts. It’s beautiful. It’s amazing. You know, all that sort of the history of it. Not the quirkiness, but the history of it has changed.

Felix Salmon: Well, I can tell you there are still people living on that corner paying $200 a month in rent. Sure.

Emily Peck: For them.

Felix Salmon: Mean, did you want to ask about the racial aspect to home appraisers? That’s been a bunch of headlines about that recently.

Emily Peck: Yes, I read about it and I just I’m not sure what exactly is going on right at the moment. But my understanding is there is racism in home appraisals where if an appraiser goes in and there’s like signifiers in the home that the occupants are people of color, of black people, the appraised value is lower. And there’s all these stories you read. You know, a family says, we had our family photos on the wall and we took them down and then we took away all the signifiers and the price went up like a substantial amount. And I’ve read a lot of stories about it. I don’t know what’s being done about this or how appraisers think about it. So I was curious to ask you.

Speaker 3: Yeah, this is a topic near and dear to my heart and my industry is according to the Bureau of Labor Statistics, we’re 98% white roof, 98% out of 400 industries that they track. We’re dead last in diversity. And yet, you know, the leadership in our industry says we’re not you know, there’s no problem here.

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Speaker 3: And I there’s a structural problem and how to get in And the profession we have, you know, trade organizations and in Washington, the Appraisal Foundation, which is for 30 years, has never had any people of color on any of their boards until I started blogging about it in 2020. And so the. Sorry. You know, the articles that Emily sees? How can the industry defend against that when it’s all white? I mean, I’m the perfect profile. I’m a middle aged white guy. You know, we’re aging and we’re white, and we’re mostly male. And how does that happen?

Speaker 3: Well, one of the reasons that happened is because of I think Emily mentioned the beginning, where you have in the thirties and 1930s, you know, the sort of precursor to Fannie Mae red light. Like they had maps. This is a bad area. This is a good area. And the appraisers at that time sort of morphed into this appraisal industry. And the only way people can really get into the industry is through the relatives. Right. That was the way through, you know, years and years and years and years of, you know, industry practice.

Felix Salmon: Is it still like family dominated? Would you say that most of the appraisers in the industry today like that, that they come from a family of appraisers, their father and grandfather before them were raises?

Speaker 3: Absolutely. Absolutely. Their uncle, they’re you know, I mean, we didn’t but we as a family started our business in 1986 with my parents. And we just sort of broke in and were, you know, trying to be obnoxious New Yorkers and just we weren’t taking no for an answer. And we got in and became established. We had no legacy before, but that was atypical and it’s still that way today.

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Felix Salmon: Your clients, the banks, right? There’s the banks who hire the appraisers to make sure that you.

Speaker 3: Know, so the stereotype of an appraisers, they work for banks for mortgages, right? That’s about a third of our business. So we do we work for banks, but the majority of our business is private, non interest rate related, like not refi and purchase type appraisals. I consider myself the best dumb waiter appraiser in the world because I appraise dumbwaiter air shafts and old Park Avenue buildings where the shareholders trying to take that unused open space into their apartment to improve their layout. Or we appraise hallways. We appraise, you know, we appraised the Starbucks was improperly vented and the second floor apartment above it smells like Jamaican blue mountain coffee, you know, intensely. What’s the impact of value on that?

Felix Salmon: I mean, presumably it would be very positive.

Speaker 3: What if you like blonde or you don’t like the harsher sort of tones of the coffee and, you know, sound, you know, people tap dancing above you and all kinds of crazy stuff. And we do lots of litigation. Just before the pandemic, I spent seven days in court testifying on a situation with two people that had more money than they really had used for that were suing each other.

Felix Salmon: So so so explain to me, like, given this vast range of like appraises used and needed. Why is it so hard to break into the industry and then explain like, what are the realistic barriers to entry? Like how how is it if I’m a person of color and I think to myself, that seems like a decent wage and living? Why is it so hard for me to get into that?

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Speaker 3: Well, it’s a mentoring structure and it’s been exacerbated by a third party institutional organization called Appraisal Management Companies, where during the financial crisis, the housing bubble, there was criticism in the appraisal industry that we were too close to, say, mortgage brokers and mortgage brokers hated my firm because we made them pay for the appraisal before we would give them the report. You know, said that there was no like hanging over our heads, which is a huge problem. And think about an appraiser has a mortgage family to support college payments. And unless they hit the number, they go out of business. And that’s what the housing bubble was like.

Felix Salmon: It was just like the credit rating agencies with the CDOs, and it was exacerbated.

Speaker 3: It’s exactly the same thing. And we weren’t morally flexible. And so, you know, we thought we were going to go under. I could see my everything going away in the housing bubble. But the problem is, is that no one in any period of time has allowed the appraiser to be independent without sort of threatening their livelihood. We need to create an environment for that.

Speaker 3: The mentoring system means that, you know, the way it sort of works in practice is you can’t really do an appraisal for a bank even though Fannie Mae is okay with it. If you’re a trainee and you can only be an appraiser after about two years of experience and a bunch of classes. And so who do you work for? Well, you work for the firm that that appraiser got from their uncle, that got from their great grandfather. And then on top of it, the AMP C’s, which are the corporate middlemen. They burst on the scene about 15 years ago. And they get half your fee. So like in your next career. Felix If you decide to be a movie star, you know, the agent gets 10%, right? In the appraisal profession, they get 50%. That’s so.

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Speaker 3: And this started with Dodd-Frank after the financial crisis. And the problem with that is you get a different caliber. People are you get people going away or not coming into the profession because you basically have to work for somebody. If you’re lucky for two years, they kind of have to supplement year. You’re not making money for them, really. And then you get to be an appraiser and then you go work for yourself. And the two years investment that that company had in you, you know, is wasted. So people are reluctant to take on new people. So the industry is aging.

Speaker 3: And this mentoring system, which doesn’t exist in the legal profession or the accounting profession, it’s just different. I don’t know why we can’t be that. And one of the barriers to that is the Appraisal foundation, which basically has set this up for the industry. And I feel the reason why we’re 98% white. Oh, just one thing to add. When I brought this to light, the 98% in public, even though it’s printed in the BLS numbers, they formed a diversity committee and the chairman is a middle aged white guy, right? I mean, sort of, you know, like they don’t see it. And so we’re now starting to see investigations by HUD and other entities to sort of fix this. It’s it’s sad.

Felix Salmon: It’s people a judge going away. He’s not housing. He’s transport. Who’s the housing trapped?

Emily Peck: Marcia. Marcia Fudge.

Speaker 3: Marcia Fudge and Marcia Fudge created this. Are the Biden administration created this task force called PAVE. I forget what the acronym is, but it was all the agencies and it was cabinet level to address racism and valuation and, you know, sort of mixed results, but kind of moving it forward. Hopefully something happens.

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Felix Salmon: Let’s have a numbers round and we’ll save the best of last. So, Emily, what’s your number?

Emily Peck: Wait, what? So I’m the worst? Yeah, worse.

Felix Salmon: You’re the worst in the past. And Jonathan is the best and the worst.

Emily Peck: All right. Fair enough. My number isn’t, like, amazing. It’s 16.63. Okay. Percentage 16.6, 3%. That was the average rate on the 30 year mortgage in 1981 per Freddie Mac. So everyone’s complaining now. The mortgages are high. I’m just saying 1981 they were over 16%. So it’s not so bad.

Felix Salmon: Elizabeth, you have a number?

Speaker 4: Sure. Mine is related to something we’re going to talk about. In the past, the average size of the condo unit in New York City is less than 1600 square feet per what we were talking about earlier. Condos Felix are not the same thing as rental apartments generally.

Felix Salmon: I think it’s just it’s just language. And the apartment is an apartment. Mine number is $177 million, which is the amount of money that Mark Andresen, the venture capital to spent on a house in Malibu, which is weird because he doesn’t live in Malibu.

Speaker 4: How big is it?

Felix Salmon: It’s probably more than 2000 square feet. But my favorite thing about his $177 million house is that I think it was the most expensive house in California history or possibly even in American history. And it wasn’t enough for him. So he then turned around and spent another 44 million on another house just down the street because he needs like a whole complex going on in southern California, in Malibu, which again, is not even where he lives.

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Speaker 3: And by the way, that $177 million house is just under 12,000 square feet. So that’s like 15,000 a foot if you want to get technical, which is.

Emily Peck: A lot.

Felix Salmon: Batshit.

Speaker 4: That’s yeah.

Speaker 3: That’s a.

Felix Salmon: Lot. Like if you think about it, you could take a square foot of space and cover it in hundred dollar bills and that would cost and that would cost you what, maybe like $900 or something.

Emily Peck: Where it’s $15,000 for a square foot of space. Yeah. Okay. Now I see how that is a lot.

Speaker 3: I mean, you know, there’s four little over four acres of land and actually there were two sales in Manhattan at 220 Central Park South that were higher than that sale, one for 239 million, one for 188 million.

Felix Salmon: But that one, that’s apartments in terms of houses, this is this.

Speaker 3: Is the highest. You’re right.

Felix Salmon: So, Jonathan, what’s your number?

Speaker 3: Well, on that same topic, 14000 to 85, and that is the price per square foot for a condo on billionaire’s Row that came on the market for $250 million.

Felix Salmon: This is the triplex, right?

Speaker 3: Yeah. And I just want to point out that the rest of the building, the developer has been discounting the asking price by at least 25%.

Felix Salmon: And so what happens is if you discount 14,000 and change by 25%, it’s still something Stratford.

Speaker 3: 7000, whatever, which would be the, you know, on par pretty close to the all time record, which was a not all time record, but sort of the top of this super luxury market is, you know, ten, 11,000 per foot.

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Felix Salmon: And this house or this apartment or I guess I should call it this condo, because if it’s an apartment at the word this apartment because I’m English, I refuse to bow down to such silly term and illogical stuff. This apartment is clearly designed to not be a primary residence. Right. It’s mostly a ballroom as far as I can make out.

Speaker 3: I’m not sure about that. I just know that most of these are not primary residences. It took me about 15 years after starting my work as an appraiser in Manhattan to not be incredibly depressed when I come out of these huge places and say, you know, they have seven other homes. But yeah, so I just found it interesting.

Speaker 3: And the other point I wanted to make is that and what I’ve seen so as a hobby, because I’m a dull and boring numbers guy, I tracked sales in the U.S. over $50 million for fun. And what I’ve learned is that these sales end up being a circus sideshow, that they’re not. Intricately connected to the local market. You know, it’s more of a global or national market, and it’s really true. And so I think even with a housing market slowdown, 2022 is probably going to end up being the third highest total number of these transactions that I’ve recorded since the year 2000.

Felix Salmon: Now, how many states of the 50 states in America, how many states in America have ever seen a $15 Million transaction?

Speaker 3: For the most part, it’s just three if you don’t count ranches in Montana or Texas. So California, Florida and New York. And actually, if you can fine tune it even more and say that it’s Manhattan and the Hamptons for New York and then California is mostly Los Angeles. So a little bit of Malibu, you know, sort of connected to that. And then Florida has been dominated by Palm Beach. But now we’re starting to see this kind of activity in Miami.

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Felix Salmon: Not the Bay Area now. No.

Speaker 3: No, not this time. Not not these kinds of prices on a regular basis.

Felix Salmon: That’s super fascinating.

Speaker 3: But you’ve had plenty of $75 million transactions, just not, you know, 100 plus that we are seeing in all these other locations.

Felix Salmon: I think on that note, we will wrap up the main part of the show, But we do have time for a sleep last segment, which Elizabeth is going to come in and ask a burning question. Jonathan, it’s been amazing having you on the show. We really appreciate it. And I’m so happy to be here. I’m so glad we finally managed to make this happen.

Speaker 3: Absolutely.

Felix Salmon: And yeah, and so stay tuned for the great Elizabeth Spiers sleep first for Jonathan Miller. But other than that, thanks for listening. And we’ll be back next week and even more sleep money.

Felix Salmon: All right, Elizabeth, what’s your burning question?

Speaker 4: I feel like this was your burning question, but why do people want such enormous houses? Right. And just in terms of square footage, why is it going up? It’s going up in Manhattan, maybe because there are combined housing units. The average size of an apartment in New York City is 975 square feet now because of that.

Felix Salmon: Small by urban standards. Oh, sure. So I have a theory about this, but I really want to ask Jonathan, because my theory is that people need workspace now. Work from home is just part of how we live. And that’s basically a whole extra room. And that’s one of the reasons why demand for space has gone up in the pandemic. But even before the pandemic, the amount of space that people had was going up. The average square feet per house or square feet per new construction has been on an upward trend for decades. And what explains that long secular upward trend? Why do people just want more and more and more space?

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Speaker 3: I have a formula for that. I did the math. It’s one plus one equals two and a half. So there’s a premium per foot for larger contiguous space, and that is driven by that same desire for large and the constraints of the city. You know, the suburbs, it’s the opposite. When you get to a much larger house, the per foot actually drops. Oh, interesting. When I think of the city, it’s hard to get contiguous space. Right.

Felix Salmon: Well, give me some numbers here. Like, how big do you need to be in the suburbs before this price per square foot starts falling?

Speaker 3: 5000 for 4500. 5000.

Felix Salmon: Okay, So for me, like 4500 or 5000 square feet is just an insane amount of square feet. If I live if I lived in the 5000 square feet of anything, I would have no idea where my kids were, where my phone was, where my glasses.

Speaker 4: Anxiety levels would go up.

Felix Salmon: If I wanted. If I wanted to talk to someone else in the house, I would have to walk around for half an hour trying to work out which of the 18 rooms they were in. How is this like a normal, natural way to live?

Speaker 3: Well, during the pandemic, the house that we used to live in was about 4500 square feet. And all my kids are moved out and my wife and I, the whole pandemic we’re in, she’s our CFO, in our company. So she writes my paycheck. So I don’t even know what I make. I just know my ATM card always works and we’re an absence, a house. And then for meals, we meet in the middle in the kitchen because I talk very loudly, says.

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Felix Salmon: You take you too far West Wing. And she took the West Wing.

Speaker 3: And then maybe.

Felix Salmon: Once that.

Speaker 3: Was sort of, you know, in very close proximity. But it’s it’s still all good. You know, I think it’s it’s just a symbol of having more. And one of the things that sort of it just came up and I got tired of hearing it during the pandemic was people move to the suburbs and they want more, you know, big homes, huge homes. They want more square footage. And I feel like that was somewhat of a misnomer.

Speaker 3: And the reason for that is because what happened in the suburbs, it’s just like in the city, is the housing market inverted, that the once dormant upper third of the suburban market that was skipped over after the financial crisis to, you know, new urbanism and buying strawberries at three in the morning in the city, the high into the suburbs woke up. And so the average square footage for like the county or the city would rise. But it’s because there was a shift in the mix. So I’m I think the bigger, you know, sort of the bigger play of at least on the pandemic perspective, not really answering specifically what you’re asking was, I think, overhyped a bit.

Felix Salmon: To go back to the original question, what explains the multi decade long secular increase in square feet per person?

Emily Peck: Everyone wants their own bathroom. That’s the answer.

Speaker 3: I’m sorry, I don’t disagree. I think Emily’s right on. I think it’s just more having more. And what’s interesting, you know, maybe with the advent of computer games and kids not being outside as much, it’s growing at the expense of smaller lots. That’s what we’re seeing. Bigger houses, McMansions on smaller lots.

Felix Salmon: Yeah, exactly. Who wants 7000 square feet of house on a third of an acre lot? Jonathan Miller, thank you so much. This has been fantastic.

Speaker 3: Oh, my pleasure. I’ve really fun.