Jonathan Miller on Real Estate After the Coronavirus

Episode Summary

Executive Summary: In this Masters in Business podcast episode, Barry Ritholtz interviews Jonathan Miller, CEO of Miller Samuel, about the impact of the COVID-19 pandemic on the U.S. real estate market. They discuss rapidly changing conditions, including a dramatic drop in new listings, the lag in contract data, and the challenges of appraisals and virtual showings during lockdown. Miller highlights the risks of hiding 'days on market' data, the limited effect of low mortgage rates, and the potential for pent-up demand and a shift to virtual processes post-crisis. The conversation also touches on market comparisons to 9/11 and the 2008 financial crisis.

Main Topics: Immediate Impact of COVID-19 on Real Estate Activity (Priority: 5/5): Discussion of how the pandemic has frozen the spring selling season. Miller notes that Manhattan inventory, which typically rises 10% through March, actually declined 9% this year. Contract activity shows a lag of 2-3 weeks and will soon reflect a slowdown. Hiding Days on Market (DOM) Data (Priority: 4/5): Miller criticizes the decision by platforms like StreetEasy and the Real Estate Board of New York to hide DOM from buyers. He argues this is not to help sellers but to protect agents' listings, and it will breed future distrust. He advocates for tolling DOM during the crisis instead. Mortgage Rates and Liquidity Issues (Priority: 4/5): The Fed's rate cut to zero has not lowered mortgage rates; 30-year fixed rates are actually slightly higher than at end of February. Reasons include lender capacity cuts, risk of rising unemployment, and liquidity concerns in the refinance market. Appraisal Challenges and Virtual Alternatives (Priority: 3/5): Interior inspections stopped due to health risks. Solutions include 'desktop' appraisals using homeowner photos and 'curbside' appraisals with FaceTime walkthroughs. Miller warns that waiving interior inspections for cash-out refis could lead to fraud and predatory lending. Virtual Showings and the Limits of Digital Real Estate (Priority: 3/5): Virtual tours and 3D showings are unlikely to replace in-person visits for the largest asset purchase. Unique intangible factors (smells, feel, neighborhood) cannot be captured digitally. Miller shares a personal story of a seller using bacon smell to hide a roof leak. Post-Crisis Market Outlook and Silver Linings (Priority: 4/5): If the lockdown ends by May, the spring selling season is lost but pent-up demand could create a large fall market. The crisis may help sellers de-anchor from outdated pricing expectations. High-end markets have been deteriorating for years; this could accelerate price discovery. Social and Demographic Effects of Lockdown (Priority: 2/5): Extended time at home may spur a baby boom or divorce wave. Home layout (compact vs. sprawling) affects compatibility. Miller expects increased demand for larger spaces and suburban spread. Real estate agents and appraisers as independent contractors face financial risks without unemployment benefits.

Key Arguments: The spring selling season is effectively lost; new listings have dropped sharply as sellers withdraw properties or delay listings. Hiding days on market is a bad idea that undermines transparency and consumer trust; the real motive is to help agents keep listings, not sellers. Low mortgage rates from the Fed have limited effect due to lender capacity issues, rising unemployment risk, and liquidity concerns in refinancing. Virtual appraisals and showings are temporary solutions but cannot replace in-person inspections for large assets; they risk increased fraud and litigation. The crisis may force sellers to adjust to current market prices more quickly, especially in high-end markets that have been declining since 2018. There will be significant pent-up demand when the crisis ends, but the recovery depends on how long the lockdown lasts and the severity of unemployment. The real estate industry's reliance on independent contractors (agents, appraisers) creates a vulnerability that may not be fully addressed by stimulus packages.

Data Points: Manhattan inventory change (Mar 2020 vs. typical): down 9% vs. average 10% increase - Since beginning of time, inventory rises through end of March; this year it fell, indicating sellers are not listing. 30-year fixed mortgage rate trend: slightly higher than end of February - Despite Fed rate cut to zero, mortgage rates rose due to capacity issues and liquidity concerns. Months of lockdown assumed for analysis: 2 months (May) or longer (July) - Miller considers both optimistic and pessimistic scenarios for recovery of housing market activity. Time for seller 'de-anchoring' from peak prices: 1 to 2 years - Miller observes it takes sellers 1-2 years to adjust to market declines; crisis may accelerate this. Time lag in contract data: represents activity from 2 to 3 weeks ago - Current contract data reflects offers made before the lockdown, creating a false positive in market health.

Pivotal Quotes: "The buyer is essentially, this data is being hidden from them. The problem is, or actually, what's actually happening is the raw data, like the listing dates, things like that, are not being hidden. But when you open and look at a listing, instead of saying, you know, on the market 108 days, it'll just be blank or not or hidden. And to me, that will breed future distrust between the consumer and the real estate community." — Jonathan Miller: Criticizing the decision to hide 'days on market' data from buyers, arguing it undermines transparency and trust. "If this became Mainstream where we could do no inspections for refis, I can only imagine the fraud and the predatory lending that would simply explode." — Jonathan Miller: Warning about the risks of waiving interior inspection requirements for refinance appraisals during the pandemic. "The longer that the lockdown lasts, the more damage to our economy occurs, even with the stimulus money that's coming out. The problem is that if this runs very long, you're going to have a much higher unemployment rate. And in theory, then that cuts down on potential purchasers for properties." — Jonathan Miller: Summarizing the key uncertainty: the duration of the lockdown determines the severity of economic damage and housing market recovery.

Implications: The real estate market faces a profound liquidity and transparency crisis during COVID-19. Short-term fixes like hiding data risk long-term trust. The industry will likely see a shift toward virtual processes, but major purchases will still require in-person evaluation. Sellers must adjust pricing expectations. Pent-up demand and a strong fall market are possible if unemployment is contained. Independent contractors need targeted relief.