Saturday , 28 November 2020

An Interview with American Enterprise Institute

Edward Pinto
Edward Pinto, Director of AEI’s Housing Center

The Eighth Annual AEI-CRN Housing Conference will be taking place October 16th – 17th. This free event is happening in DC; hear the latest insights regarding AEI’s (American Enterprise Institute) housing data, the appraisal process, market trends, and more starting October 16th. Unable to make it to DC? Watch the livestream of these events directly on your computer. This two-day conference will  feature panelists Stephen Oliner and Edward Pinto of AEI, and Joan Trice of the Collateral Risk Network (CRN). Register or watch this event via livestream here!

We sat down with Edward Pinto, Director of AEI’s Housing Center, to further discuss the event and his two presentations.

Buzz: Thank you for joining us today. Can we have your history in the appraisal industry?

Ed: My history is in real estate finance and credit policy. I was Chief Credit Officer and Executive Vice President of Fannie Mae in the 1980’s. My research focus since 2008 has been in housing, finance, and collateral risk. Back in the early 1990’s, I created the first automated valuation model (AVM) that was used in bank lending without an appraisal. I’ve got a long history in the evaluation area, but not as an appraiser.

Buzz: What is this conference all about? Are there any insights or sneak peeks you can give us?

Ed: All eight of these conferences have focused on housing. It started with a focus on risk, particularly housing and mortgage risk. We’re now bringing in housing markets, including risk by demand, the difference in validated price, etc. and all of the research has been done by the AEI Housing Center and collaborators.

In terms of a sneak peek, we just announced a couple of days ago that Mark Calabria, who is the Director of the Federal Housing Finance Agency, will be our keynote speaker at lunch on Wednesday. We’re really excited about that. We’re also excited to see the appraiser perspective of Panel four – The Price of residential land for counties, at the zip code and census tract level.

There is a slot on an appraisal form for doing a reconciliation of the replacement cost and land cost, and coming up with that reconciliation to the price determination. However, that data is hard to come by. And so, this is an effort to develop a methodology that can do it nationwide across a very fine geography, over a relatively lengthy periods of time. What’s unique about this is that the data from literally millions of appraisals were used in coming up with these price indices – an update of that research will be presented at the conference. Panel three will present some new work on mortgage risk going back to 1990. This is something that needs to be firmly in the mind of appraisers since mortgage risk and collateral risk obviously impact values. An update of that research will also be presented. What’s unique about that is we had access through FHFA to all of the Fannie Mae and Freddie Mac loans going back to 1990, and that information has never been available publicly to analyze.

The last one is Panel one, the Housing Market Indicators. Again, what we have in the market trends reports are really customized versions of the housing market indicators – where the housing market indicators were providing information at the national level, the county level, and the metro level. We use that same information that we have in our datasets to provide the market trend reports I mentioned in panel seven.

Buzz: You have two separate presentations. Can I have a brief synopsis of the single-family presentation?

Ed: I will be presenting on the current state of the single-family market from a new supply perspective. I’ll be presenting a research that shows how much new construction there is in the single-family market with national numbers. I’ll be looking at trends over time, what stops or delays new construction, and what keeps the supply constrained below where demand is.

I’ll also be presenting solutions about how to solve this problem. In particular, we’ve developed a dataset that allows us to identify and track new construction sales at the property address level in virtually real-time. I’ll be presenting information about what we call our “heat maps,” where we can show where the new construction took place into two price points in the market on a metropolitan area map.

First-time buyers are about seventy-five percent of the market we call “entry-level,” which is about the bottom half of the market nationally. The “move up” market represents the other half of the market. In the new construction area, the entry-level market is smaller than the move up market; it’s about 25 or 30 percent entry-level, and the rest is move up. I’ll be presenting heat maps for various metropolitan areas, showing how trends that impact the market are not the usual answers that people expect. Namely, that is lumber, labor, land, and laws.

I’ll be presenting data that shows that lumber and labor are very minor factors, if at all. It really comes down to land cost and local land-use laws. With the combination of the two, it makes it very difficult to build entry-level housing.

There’ll be a second presenter that will be presenting the case study of Palisades Park, New Jersey. It will focus on the construction of duplex homes under the zoning law in Palisades Park, which has been in place since 1939. This is a big topic today – the states of Oregon and Minnesota have both passed laws to promote the building of duplexes without the zoning restrictions that have historically been in place. Palisades Park, New Jersey has the flexibility of going back to 1939, so they will explain in terms of this case study what’s actually happened to that specific area.

This will point out, that since the 1970’s, the stock of homes has largely shifted from single-family one unit to a lot of duplexes. The population of the town has increased from about 12,000 to 22,000, which is quite a large increase. However, from a density perspective, it doesn’t look to be all that dense. It was not done with high-rise buildings and high-rise apartments. It was done by basically putting two units on what has been a family lot with one single-family home.

Buzz: May we have a brief synopsis of the next presentation, regarding market trends and variability?

Ed: I have been involved in the valuation area for many years. I’ve also been involved with the CRN since around 2007. This timing was right around when the CRN and AEI started sponsoring these annual conferences. We wanted to really focus on collateral risk, as the Collateral Risk Network does.

If you look at all of the topics that we have for this conference, they all touch on this whole valuation question. Market information, supply and demand, market trends report, land cost, and the risk trends are all things relevant to collateral risk. This conference is really all about housing markets and housing risk, but very heavily from the perspective of collateral risk. I’ve spoken at the CRN and AEI meetings over the years about market price. How do we distinguish between market price and value?

“What is the highest price this particular property would sell for today?”

That question is very different than market value. Market value is based on fundamentals while the market price is based on supply and demand.

Supply and demand can ebb and flow, but fundamentals tend to change very slowly and tend not to be very volatile. House prices, of course, can be quite volatile. I’ve been working on how to put the market valuation piece into the appraiser’s hands. So, I’ve developed what I’m calling a Market Trends Report, which focuses on the market area of the subject property.

Sometimes it’s the metro area, other times it’s at a county level, or a census tract level, depending on what particular trend we’re looking at. We’ve developed a dataset that will have the ability to query particular addresses and get a market trends report relative to that particular property. Not the specific address per se, but the market area selected.

We’re not providing valuations; we’re providing market trend information that helps figure out whether the price of the property today is also the value of the property today. We’ll be providing information on rent trends, wage trends, construction costs, new constructions, and supply. New construction supplies percentage of sales and stock. All of these things are relevant to the question: “Is there a deviation from the value of the property versus the price of the property?” We’ll also be providing information on mortgage risk and house price appreciation.

How quickly has the house price appreciated for a particular price and how does that relate to the fundamentals of risk? It’ll be a 20+ page report that the appraiser can then use in developing an opinion. That report will be available for over 100 million properties and will be made available for free by AEI.

Our goal is to get this information out there. I’ve been talking about this in front of the CRN since 2011-2012, and it’s taken us this long to figure out how to do this. We’re going to try to jumpstart the market; Hopefully, private players, private businesses, and others will take lead with this, and develop additional products that provide information integration. Today, I find that the appraiser has very little information that allows them to make the decision on value, relative to price, in any meaningful way.

Buzz: Why should appraisers attend this conference?

Ed: I think appraisers should attend because this conference is going to present some practical research on several topics that are of tremendous interest to appraisers. Topics such as market trend reports at very granular local levels, housing market trends, indicators at national and metropolitan levels, land value trends nationwide, county, zip code, and census tracts that have never been available before, and mortgage risk.

Going back to 1990, the appraisal process that was in place was not sufficient to keep the housing finance market out of the ditch. Of course, the CRN was instrumental, Joan Trice wrote the white paper relative to collateral valuation and found that the process really wasn’t up to the task. That’s why the final panel, Collateral Matters, will really pull together some of these themes.

How do we fix this once and for all? Because we’ve been talking about it for a very long time. Yes, we still have a problem – that’s why we’re putting out all of these market trends reports.

We decided to pull these reports together and make them available to the appraiser and real estate profession. There is a void that we think is important to fill, so we’re doing our part to try to provide a service to the real estate appraisal profession and fulfill what hasn’t existed for many years.

Thank you so much for answering my questions. Make sure to register for the conference or attend it via livestream here. Have any comments or would you like to submit an article of your own? Email for more information.


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