Felix Learns What A Condo Is

Summary

Slate Money – Felix Learns What A Condo Is

Date: October 8, 2022
Host: Felix Salmon (Axios)
Co-Hosts: Elizabeth Spiers, Emily Peck (Axios)
Guest: Jonathan Miller (Appraiser & Market Analyst, New York)

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Overview

In this episode, the Slate Money team dedicates the entire discussion to the housing market, joined by Jonathan Miller, a veteran New York appraiser and market analyst. The conversation explores the dynamics between mortgage rates and home prices, the stickiness of housing markets, the peculiarities of American homeownership, luxury real estate, supply and demand conflicts (YIMBY vs. NIMBY), racial and structural biases in real estate appraisal, and some eye-opening numbers from the world's most expensive homes.

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Key Discussion Points & Insights

1. Mortgage Rates and Housing Prices

[01:00–05:56]

• Sticky Prices:
  Miller dismantles the common belief that rising mortgage rates instantly lower home prices.

  “Prices are sticky on the downside because if the seller doesn’t have to sell and they don’t get their price, they don’t sell.” — Jonathan Miller [02:15]

• Volume Drops Before Prices:
  With mortgage rates high, most homeowners “sit tight," leading to reduced transaction volume rather than immediate price decreases.

  “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.” — Felix Salmon [05:16]

• Golden Handcuffs:
  Most U.S. homeowners have very low fixed-rate mortgages, discouraging them from selling and trading up/down.

  “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.” — Emily Peck [03:15]

• Personal Anecdote:
  Miller shares his own recent buying experience: “We beat 30 other parties... I only paid 36% above asking price.” [07:01]

2. Luxury Real Estate & the Pandemic Boom

[08:10–10:46]

• The ‘Weenie Waving’ Effect:
  The drive for bigger, flashier homes among the ultra-rich is often about “parking money," not daily living.

  “People had the world's most expensive bank safety deposit boxes.” — Jonathan Miller [09:18]

• Pandemic Patterns:
  The luxury sector (e.g. Billionaires’ Row) saw a rapid sell-off during the pandemic even after a prior glut.

  “There was a tremendous surge in luxury sales activity during the pandemic era, which was an inversion… because lower wage earners were much more economically punished by the lockdown.” — Miller [10:18]

3. Renovations, Divorce, and Market Timing

[10:46–13:17]

• Renovations as a Relationship Test:
  Miller notes an odd trend: 90% of divorce-related appraisals his firm does involve recently renovated apartments.

  “People think they can make themselves happy by renovating their apartment, but it turns out it’s actually their marriage.” — Felix Salmon [11:28]

• Value of Renovation Varies:
  Renovation payback depends on timing; hot markets reward sprucing-up, slow ones don’t.

4. Urban and Suburban Market Dynamics

[13:34–16:23]

• Year-over-Year Data Distortions:
  Post-pandemic numbers look bad compared to 2021's “insane supercharged market", but less dire measured against pre-pandemic.

  “It looks like contracts are down 30%. If you compare them against pre pandemic... contracts are down about 12%.” — Miller [14:07]

• Supply, Demand, & Gentrification Debates:
  Felix poses the classic “Does building more luxury housing make neighborhoods more or less expensive?”

  “If you build a bunch of luxury apartments in a neighborhood, is that going to gentrify that neighborhood and make everything... more expensive, or will it reduce prices via supply?” — Felix Salmon [16:23]

• Expert’s Take:
  Miller: Impact is real but nuanced; luxury builds have some upward influence but don’t automatically cause across-the-board price spikes.

5. YIMBYs vs NIMBYs: Who’s Right?

[17:11–23:35]

• Cities vs. Suburbs:
  In urban areas, increasing supply means luxury supply; it doesn’t necessarily lower prices for everyone.
  In suburbs with more land, NIMBYs fear property value drops from multi-family housing, but Miller’s experience shows little to no effect.

  “I think the NIMBYs are generally wrong.” — Jonathan Miller [22:08]

• Other Concerns:
  Financial impacts are often overblown; greater worries are about taxes and school infrastructure.

6. Factors That Might Actually Lower Prices

[24:13–27:40]

• High Rates:
  Longer periods of high mortgage rates might stagnate or put pressure on prices, but rarely cause outright drops except in periods of sustained economic distress.

• Boomer Die-Off and Land Value:
  Boomer housing stock is often dated; true value increase is mainly in the land, not the structures.

7. Rental Market and “Apartments” vs “Condos”

[27:40–32:34]

• Rents Peak:
  Rents have soared, especially in New York, but bid-ask records may be plateauing.

  “Manhattan rents... did not set a new high. They are only the second highest in history.” — Miller [27:49]

• Class Distinction:
  The U.S. uniquely labels identical properties differently by tenure; “apartment” if renting, “condo” if owned.

• Urban vs. Suburb Rentership:
  Most city dwellers rent; suburbs are homeownership bastions, leading to marked differences in school funding and social stigma.

8. Historical Context: Race and Housing

[32:34–36:44]

• Structural Racism:
  Redlining, deed restrictions, and federal policies created white-dominated, property-owning suburbs.

  “The suburbs... were created as sort of like a white haven. Black families couldn’t get mortgages there.” — Emily Peck [32:47]

• Urban Decline and Recovery:
  New York neighborhoods once had “negative value”. Swanky apartments on Lex could be had for less than the annual maintenance.

9. Racism in Real Estate Appraisal

[36:17–44:14]

• Appraisal Industry Lacks Diversity:
  The field is “98% white… dead last in diversity of 400 industries" [36:54].
  The traditional mentor-and-family-entry system creates barriers, especially for people of color.

• Bias and Discrimination:
  Miller admits:

  “...if an appraiser goes in and there’s signifiers that the occupants are people of color... the appraised value is lower.” [36:17]

• Barriers to Entry:
  It’s hard to break into appraisal work without family connections; financial arrangements and regulatory structures perpetuate this.

10. Wild Real Estate Numbers & Trends

[44:44–50:48]

• Historical Mortgage Insight:

  “The average rate on the 30-year mortgage in 1981 was 16.63%.” — Emily Peck [44:57]

• Space & Costs in New York:

  “The average size of the condo unit in New York City is less than 1,600 square feet." — Elizabeth Spiers [45:20]

• Stratospheric Prices:

  • Marc Andreessen’s $177 million Malibu house ($15,000/sq ft) [45:35–46:25]
  • A Billionaires’ Row condo: $14,285 per sq ft, asking $250M, likely to be discounted by at least 25%. [47:14]

• Ultra-Luxury Market is a Global Microcosm:
  Such eye-watering prices are atypical; “these sales end up being a circus sideshow... They’re not intricately connected to the local market.” — Miller [48:17]

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Notable Quotes & Memorable Moments

• On why sellers don’t cut prices immediately:

  “Prices are sticky on the downside because if the seller doesn’t have to sell… they don’t sell.” — Jonathan Miller [02:15]

• On the true value in housing:

  “When properties appreciate, most of that appreciation is the land value, not the house... The land is truly appreciating.” — Jonathan Miller [26:55]

• On the “stigmatization” of renting:

  “There was absolutely... stigma. People would say, ‘Oh, you don’t own?’... I thought that was sad.” — Jonathan Miller [31:35]

• On the racial legacy in real estate:

  “The suburbs were created as sort of like a white haven... Black families couldn’t get mortgages there.” — Emily Peck [32:47]

• On luxury units as status objects:

  “People had the world’s most expensive bank safety deposit boxes.” — Jonathan Miller [09:18]

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Timestamps for Important Segments

• Mortgage rates and sales stickiness: 01:00–05:56
• Luxury market behavior & pandemic trends: 08:10–10:46
• Renovations & divorce rates: 11:09–13:17
• NYC and national market volume/price shifts: 13:34–16:23
• YIMBY vs. NIMBY dynamics: 17:11–23:35
• What brings prices down (if anything): 24:13–27:40
• Rent trends & “apartment” vs “condo” talk: 27:40–32:34
• Race, redlining, urban/suburban histories: 32:34–36:44
• Structural racism in appraisal industry: 36:17–44:14
• Numbers round (mortgage rates, giant houses): 44:44–50:44

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Tone & Style

The episode is witty, analytical, and accessible, mixing data and personal anecdotes with references to market trends, policy history, and even old detective radio shows, all while engaging Jonathan Miller’s expert insights and the hosts' curiosity.

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Summary prepared for listeners who want a comprehensive, nuanced view of the U.S. housing market—and the social, financial, and historical forces shaping it.

Transcript

[A]

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 Spires.

[B]

Hello.

[A]

I'm here with Emily Peck, also of Axios. Hi. And we are here with Jonathan Miller. Jonathan, welcome. And tell us who you are.

[C]

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.

[A]

And so when you say market analyst, you are not talking about stocks, you are not talking about bonds, you're talking about the things that we live in.

[C]

No, I'm talking about housing market analysts. And every summer I teach market analysis at Columbia.

[A]

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 YIMBYs 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 terminological bizarre ness that the Americans have that according to like whether you rent it or own it, 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 happens? What is the relationship between house prices and mortgage rates? Do house prices really go down when mortgage rates go up? Do you have an opinion on this?

[C]

Absolutely. One of the fallacies about the trajectory of home prices is this, say an external event like rates 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 correct immediately. And there's a saying in real estate that prices are sticky on the downside because if the seller doesn't have to sell and they don't get their price, they don't sell. And so there's usually anywhere from a 12 to 24 month gap. This situation we're in now is a little weird. But prices, I believe, over the last bunch of recessions generally haven't come down, except for maybe the financial cris than one other.

[A]

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.

[C]

Right. Because they had a pulse. Right. To get exactly mortgage in the first place.

[A]

But for most people selling a house is less of a necessity. Right. If you feel like you can't get a good price, you just don't sell it.

[D]

The key right now, the Wall Street Journal called it the golden handcuffs of the low mortgage rates that most people have now. I think it' 8 out of 10 people who have a 30 year mortgage are paying less than 5, 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 sitting around.

[A]

If you bought a million dollar house at a 2 1/2% mortgage, which was really quite common not that long ago, and now you think to yourself, ah, 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 a million dollars and buy something worth a million dollars, you should be like flat on the deal and just have to pay transaction costs. But in practice, 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's twice as much on a new place just because the mortgage has gone up so much. And why would anyone want to do that?

[C]

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 $1,400,000. So on top of the million four, with rates having doubled since the end of December, that's a much more difficult financial decision.

[A]

Although presumably like your own house is now a million four as well. Right. So you, you have more proceeds from selling your own players.

[C]

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 so.

[A]

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 beasts with homeownership in general. One of the reasons I think that homeownership is massively overrated on a societal level because, is that people should be able to move to where they want to live. And homeownership is very sticky, especially when prices go down and it causes people to not move and to be unhappily stuck in someplace where they don't want to live. And that's a bad thing, right?

[C]

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 also.

[B]

Jonathan, you just bought a house. How did all of those factor into your decisions about timing and other considerations?

[C]

Well, I was right on the moment that the Fed was about to raise by 50 basis points. You could see it coming. 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 won.

[A]

Wow. So you won a bidding war against 30 other bidders.

[C]

And I only paid 36% above the asking price.

[A]

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

[C]

Absolutely. In fact, this is something that I think a lot of people don't know, especially in sort of the million and up financing and the wealth management world is that by pivoting to the lender for my financial, 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 worked for us, basically.

[A]

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.

[C]

Correct.

[D]

And do they hold on to that debt or do they sell it on the.

[C]

I'm pretty sure they sell it, but they service it is how I understand it. And it's pretty common, at least in the banks that I interact with in New York wealth management type groups.

[A]

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 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. 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 gonna 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.

[C]

Right. So a developer that was still around, but when I first moved to New York in the mid-80s, 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. I will point out that after the financial crisis, there was a massive amount of overbuilding of super luxury, especially in many markets. Manhattan was sort of the poster child for that, to the point where pre pandemic, we were at nine years sellout, 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 that there was a tremendous surge in luxury sales activity during the pandemic era, which was an inversion in activity because lower wage earners were much more economically punished by the lockdown and pandemic itself.

[A]

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.

[C]

Yeah. 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.

[D]

What do you mean?

[B]

Wait.

[D]

Divorce and appraisal. So you're going and people are splitting up.

[A]

If you're stuck with a spouse in a small place, that's the recipe for divorce right there. And then when you divorce, you have to sell the house.

[D]

And that's where Jonathan comes in.

[C]

Exactly. Absolutely. 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.

[B]

Oh, that's brutal.

[A]

Oh, wow.

[C]

So be careful and rehab your apartment.

[A]

What's going on there? What's. What's the story? People. People think that they're unhappy, and they think that they can make themselves happy by renovating their apartment, but it turns out it's actually their marriage.

[C]

That's my armchair psychologist sort of rationale. I agree with you.

[D]

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

[C]

Absolutely. Absolutely.

[B]

And then the renovations end up being stressful by themselves.

[A]

Right.

[C]

Which creates some additional stress.

[A]

So talking about when you come in.

[D]

The apartment's worth more because it's.

[A]

That's what I was going to ask, like, to what degree do apartment renovations increase the value of an apartment?

[C]

So it really depends, and I hate that answer. But it depends on the market. So, for example, you can have periods like that were really slow, like the early 90s recession, where you might be lucky to get 50 cents on the dollar for what you spend. And typically, the primary impact areas would be a 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 and 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 Versailles, but it's a post war two bedroom on a low floor with a view like it's sort of money wasted.

[A]

But basically, it sounds to me like in fast markets, you can make money by doing a renovation first, and then 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.

[C]

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.

[D]

Wait, is the New York City market, that's sort of, I think, your bread and butter, Jonathan, is it slowed down in home buying? I know we talked about apartments recently.

[C]

Oh, yeah.

[D]

So it's not moving?

[C]

No, no, it's. It's not that it's not moving. It's just not moving in the insane 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.

[A]

And prices are up. Right. People are richer. The stock market is up. And right now, if you want to buy somewhere, 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.

[C]

Yeah. 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, the. 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 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. The market. Not maybe as severely, but still, you know, the market has downshifted, for sure.

[A]

Is that more or less in line with the country as a whole or is? 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, you know, reading the press, like, pretty much across America, you're seeing the same kind of, you know, the rates are the same everywhere. The slowdown is the same everywhere.

[C]

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 comprise 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. Inventory was obliterated across the U.S. manhattan didn't quite have the time because he got a late start. But yes, generally the same theme to different extremes.

[A]

The big question which I wanted to ask you is my sort of like hipster urbanist question and the gentrification question. There's basically these two camps fighting it out very vehemently and they're both convinced that 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 and 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. At least if you exclude the new builds. Which one is true?

[D]

It's obvious what the answer is.

[C]

Well, maybe we should let Emily answer. Yeah, Emily, I don't want to be wrong.

[A]

What is the.

[D]

Jonathan actually has an answer by facts.

[A]

First of all, Emily, what is the obvious answer?

[D]

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.

[C]

Let me add clarification. So I don't totally disagree with Emily, but so the way to think of it is, and I'm going to exaggerate to make my point, When Michael Dell bought a hundred million dollar condo in Manhattan at 157 facing Central park, we literally, my appraisers, we literally had feedback from someone on the fifth floor of a tenement walk up that overpriced their listing. And they said, well, if someone's going to pay 100 million in new York, then therefore my apartment's worth, you know, at least 20% more, which was absolutely not true. 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, you know, into the market, I think it has upward influence, but it doesn't dramatically change pricing in a neighborhood. So.

[A]

But the yimbys are wrong, basically. It doesn't have downward influence. It's not like supply and demand. If you increase the supply of housing, then you should thereby decrease the price of housing.

[C]

Well, 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 end housing because land costs are so high that it's cost prohibitive to build affordable, which I would define the word affordable as middle class housing.

[A]

Right.

[C]

Almost impossible.

[A]

But the existing housing stock then becomes the affordable housing stock, correct?

[C]

Correct.

[A]

But you're saying that even that doesn't ever go down in value?

[C]

Well, it doesn't go down in value because you're building luxury housing in the neighborhood. It's more the opposite.

[A]

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, like that 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 didn't go up that much.

[C]

So that was true pre Billionaires 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 70s and early 80s you had some of the glass towers, like Olympic Tower, Museum Tower go up and they certainly were higher price. Christ. It was sort of like a mini Billionaires Row sort of phenomenon. To the listeners that aren't familiar with Billionaires 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 hundred story buildings when plus or minus 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 at the top floor during a hurricane.

[A]

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.

[C]

You know that. That is a deep pull there. I appreciate. I'm going to use that.

[D]

Wait, so, okay, so in, 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? And the argument is always that will bring down our property value.

[A]

Right. Are the nimbys right or the nimbys wrong?

[C]

I think the nimbys are generally wrong.

[A]

So the yimbys are wrong in the cities and the nimbys are wrong. I think everyone in the suburbs.

[D]

Everyone, everybody's wrong.

[C]

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 REIT 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 this, 50 kids would go in and end up being like 275, which then becomes a tax burden for the town.

[D]

So, but the, but then don't those people pay taxes?

[A]

Yeah, they do, but.

[C]

They do. But the assessment on the property, the way it was structured, wasn't enough to offset the expense without raising taxes for everybody.

[A]

So, but just tell us what happened to property values? When this big REIT came in and built all of this multifamily housing, did that have any deleterious effect on all of the NIMBY's precious housing equity?

[C]

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

[A]

Even the hypothetical higher property taxes to go to pay for bigger schools, even that wouldn't bring property prices down?

[C]

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 is 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 could we use this as a park, that sort of thing.

[A]

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, you know, the realm of rationally sensible, is there anything that has been shown to have that effect beyond, like massive crime waves?

[C]

I don't know. Maybe I'm missing that from 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.

[A]

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 a ever cheap time to buy in New York City, it was probably in the mid-90s. 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.

[C]

Prices down, the way I look at it, is it keeps them from rising, that they're stuck. 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. 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.

[A]

What about boomers dying? Like when all the boomers die off and hey, I'm a boomer, and all those houses finally flood the market, could that do it?

[C]

I think they could help.

[B]

Felix is hoping for a crime wave and a generational die off.

[C]

Right, right, right. So the problem with a lot of the boomer housing stock in the suburbs is it's outdated out. You know, 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 were once grand homes are being torn down. You know, they're tear downs for new construction.

[A]

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

[C]

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, and it's more about the land that becomes available than about like all these houses, you know, because these houses, many are just really outdated.

[D]

Should we talk about rents? Because rents are.

[A]

Yeah, let's talk about rents. Because, yeah, the rents, I believe they're too damn high.

[C]

Yeah, I've heard that before somewhere. Yeah. Actually, we just published our Douglas Sallman 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 5,200 and the median is just over 4,000, which is roughly double the national. A little bit more than double the national. I think The National's like 1800. 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, with a 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 owner's 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.

[A]

Yeah, on this, 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 if rents in your neighborhood go up, that doesn't in any way increase your housing costs, and so you don't experience inflation. The only people who experience experience in inflation are those, you know, subaltern renters. 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 that renters pay and renters, you know, when you have a 65% home ownership 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.

[B]

Going back to the New York City situation, there's a good piece in the Times today that Jonathan was quoted in that talked about this, because in New York City, two out of every three households are renters, Right?

[A]

New York is the one exception to the homeownership trend for sure.

[C]

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. 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 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 American dream.

[A]

It's Germany, I tell you.

[B]

Do you think that's because renting has become more stigmatized over the years?

[C]

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 a constant, you could feel it stigma. And I thought that was sad.

[A]

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.

[D]

It has to do with racism and redlining. Right.

[A]

I mean, is there a racial aspect to that, Felix? I mean.

[B]

Felix just learned what a condo is.

[D]

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 there first.

[C]

Deed restrictions, federal policy. Up until the 60s.

[D]

Up until the 60s. 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 these white families out of the cities. And maybe at that point property values in the cities did fall.

[A]

I think there was that time where you had where city centers were 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 70s, where there were apartments, pretty swanky apartments on Lexington Avenue or whatever that had negative value because their monthly maintenance costs were higher than anyone was willing to pay.

[C]

I didn't grow up in New York. I came here in the mid-80s. But if you ever watch Paul Newman's Ford Apache, the Bronx, unbelievable visuals, which were true at the time. And when we started our company in the mid-80s, the East Village was the same. I mean, it was tumbled down empty. Lots of 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 Die Yuppie scum.

[A]

Was that the Christadora?

[C]

Christadora house. Very good.

[A]

So I used to be on the board of the Lower east side People's Federal Credit Union on the corner of 3rd and Avenue B. 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 probably more than a mile around. It was Manufacturer's Hannover, Manufacturer's Hanover decided to close because it was a miserable, horrible place to have a bank. So a bunch of neighbors bought the building, which was owned by Manny Hanny. And it's a, you know, six story building with like a dozen or so apartments and a 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, hdfc. So it became affordable housing plus a credit union. But it was all possible because the value of the real estate was basically zero.

[C]

Zero. 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. Pretty wild now. You'd never recognize these films now. It's, 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.

[A]

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

[C]

Sure.

[D]

For them.

[A]

Emily, did you want to ask about the racial aspect to home appraisers? There's been a bunch of headlines about that recently.

[D]

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's 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, 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 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.

[C]

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. 98% out of 400 industries that they track were dead last in diversity. And yet the leadership in our industry says we're not, you know, there's no problem here. 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 industry, 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? Well, one of the reasons that happened is because of, I think Emily mentioned the beginning where you have in the 30s, 1930s, you know, the sort of precursor to Fannie Mae redlined 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 their relatives. Right. That was the way through years and years and years and years of industry practice.

[A]

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

[C]

Absolutely, absolutely. Their uncle, their. 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.

[A]

Your clients are the banks, right? It's the banks who hire the appraisers to make sure they're not.

[C]

No. 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 in 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 appraise the Starbucks was improperly vented and the second floor apartment above it smells like Jamaican Blue Mountain coffee. Intensely. What's the impact of value on that?

[A]

I mean presumably it would be very positive, right?

[C]

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

[A]

So explain to me, given this vast range of appraisers used and needed, why is it so hard to break into the industry? And then explain what are the realistic barriers to entry? How is it that if I'm a person of color and I think to myself, that seems like a decent way to earn a living, why is it so hard for me to get into that?

[C]

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, so that there was no, like hanging it 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.

[A]

It was just like the credit rating agencies with the, with the CDOs.

[C]

And it was exactly, 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. 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 in 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 AMCs, which are the corporate middleman, they burst on the scene about 15 years ago and, and they get half your fee. So, like in your next career, Felix, if you decide to be a movie star, the agent gets 10%. Right. In the appraisal profession, they get 50%. That's crazy. And this started with Dodd Frank after the financial crisis. And the problem with that is you get a different caliber of people or 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 you. 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. 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, it's 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 sad.

[A]

Is Pete Buttigieg. No way. He's not housing, he's transport. Who's the housing?

[C]

Transportation.

[D]

Marcia Fudge's house.

[C]

Marcia Fudge and Marcia Fudge created this. Or the Biden administration created this task force called Pavement. I forget what the acronym is, but it was all the agencies and it was cabinet level to address racism in valuation. And sort of mixed results, but kind of moving it forward. Hopefully something happens.

[A]

Let's have a numbers round and we'll save the best to last. So, Emily, what's your number?

[D]

Wait, what? So I'm the worst in the first.

[A]

You'Re the worst in the first, and Jonathan is the best in the worst. That's how it works.

[D]

All right, fine.

[B]

Fair.

[D]

Fair enough. My number isn't like amazing. It's 6.16.63 as a percentage. 16.63%. That was the average rate on the 30 year mortgage in 1981 per Freddie Mac. So everyone's complaining now that mortgages are high. I'm just saying 1981 they were over 16%, so it's not so bad.

[A]

Elizabeth, you have a number?

[B]

Sure. Mine is related to Something we're going to talk about in the plus, the average size of the condo unit in New York City is less than 1600 square feet. And per what we were talking about earlier, condos, Felix, are not the same thing as rental apartments.

[A]

Generally it's just language. And an apartment is an apartment. My number is $177 million, which is the amount of money that Marc Andreessen, the venture capitalist, spent on a house in Malibu, which is weird because he doesn't live in Malibu.

[B]

How big is it?

[A]

It's probably more than 2,000 square feet. But my favorite thing about his $177 million house is that I think it was the most expensive house in like California history or possibly even 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.

[C]

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

[A]

That shit, that's a lot. Like, if you think about it, you could take a square foot of space and cover it in $100 bills, and that would cost. And that would cost you, what, maybe like, $900?

[D]

Or wait, it's $15,000 for a square foot of space?

[A]

Yeah.

[D]

Okay, now I see how that is a lot.

[C]

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.

[A]

But that's apartments in terms of houses. This is up there.

[C]

That's the highest. You're right.

[A]

So, Jonathan, what's your number?

[C]

Well, on that same topic, $14,285. And that is the price per square foot for a condo on Billionaires Row that came on the market for $250 million.

[A]

This is the triplex, right?

[C]

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%.

[A]

And so what happens if you discount 14,000 and change by 25% is still something stratospheric or whatever, which would be.

[C]

The, you know, on par. Pretty close to the all time record, which was not all time record, but sort of the top of this super luxury market is you know, 10, 11,000 per foot.

[A]

And this house, or this apartment, or I guess I should call it this condo, because if it's an apartment, that's the wrong word, this apartment, because I'm English, I refuse to bow down to such silly terminological 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.

[C]

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 appraiser in Manhattan to not be incredibly depressed when I'd come out of these huge places and say, you know, they have seven other homes. But, yeah, so I just found it interesting. 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 track sales in the US 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. 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. Wow.

[A]

How many states, of the 50 states in America. How many states in America have ever seen a $50 million transaction?

[C]

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 and 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.

[A]

Not the Bay Area?

[C]

No, no, not this kind. Not these kinds of prices on a regular basis.

[A]

That's super fascinating, but you've had plenty.

[C]

Of $75 million transactions, just not, you know, 100 plus that we were seeing in all these other locations.

[A]

I think on that note, we will wrap up the main part of the show, but we do have time for a Slate plus segment, which Elizabeth is going to come in and ask her burning question. Jonathan, it's been amazing having you on the show. We really appreciate it, and I'm so.

[C]

Happy to be here.

[A]

I'm so glad we finally managed to make this happen?

[C]

Absolutely.

[A]

And yeah. And so stay tuned for the great Elizabeth Baezlate first with Jonathan Miller. But other than that, thanks for listening. And we'll be back next week with even more sleep money.