Jonathan Miller on Urban Real Estate

Episode Summary

Executive Summary: The conversation centers on Jonathan Miller’s read on U.S. housing and appraisal markets amid rising mortgage rates, collapsing affordability, and shifting demand. He argues prices will lag the downturn, inventory was historically depleted, cities are not “dead,” and commercial office distress will be slow to resolve. He also critiques appraisal-regulatory bodies and overhyped automated valuation tools like Zillow’s Zestimate.

Main Topics: Housing market slowdown and affordability shock (Priority: 5/5): Miller says doubled mortgage rates and faster price growth have sharply reduced affordability, slowing contracts and demand across markets. Price adjustment lags behind market conditions (Priority: 5/5): He emphasizes that sellers take 1-2 years to capitulate, so prices do not fall immediately after rates spike or demand cools. Inventory collapse and supply dynamics (Priority: 4/5): He explains the housing market’s frenetic bidding-war environment as a result of historically low inventory, not just strong demand, and notes supply is only recovering from extremely depressed levels. Cities, remote work, and office conversion limits (Priority: 5/5): Miller rejects the idea that big cities are permanently dead, but says office vacancy is severe and office-to-residential conversion will be limited by cost, financing, and zoning. Sun Belt growth and geographic dispersion (Priority: 4/5): He sees durable growth in Florida, Texas, and other warm/lower-tax markets, driven by remote work, migration, and corporate relocation incentives. Appraisals, AVMs, and industry reform (Priority: 5/5): Miller criticizes automated valuation models and the appraisal regulatory system, arguing human appraisers are still necessary and the industry needs modernization and diversity. Aspirational pricing and luxury market distortion (Priority: 4/5): He discusses overpriced luxury listings as a recurring tactic that rarely works and can distort perceptions of local market value.

Key Arguments: Rising rates have halved affordability since the end of December, causing an abrupt demand pullback. Housing prices typically do not adjust immediately; sellers often need 12-24 months to accept new market reality. The market had an extreme inventory collapse, so current increases in listings are from a very low base. Bidding wars were widespread because low mortgage rates and limited supply created insatiable demand. New rental and housing construction tends to skew high-end and does not solve broader affordability shortages. Big-city real estate remains strong even with empty offices; urban life and remote work flexibility still support residential demand. Office-to-residential conversion is possible in some cases but not scalable because of financing, zoning, and building-type constraints. Automated valuation models are useful but materially less reliable than their marketing suggests, especially off-market. The appraisal industry is constrained by outdated mentoring/licensing structures and lacks diversity, which worsens shortages. Aspirational pricing often reflects seller fantasy rather than market value and usually ends in long days-on-market or cuts.

Data Points: Mortgage rates: about 6% - Rates had roughly doubled from the low 3%/high 2% range at the time of discussion. Housing affordability: down about 50% since the end of December - Miller described affordability as having dropped literally by half. Existing-home sale price (May): $407,600 - A record median/average existing-home sale price cited during the interview. Home sales: down 3.4% - Existing home sales fell even as prices hit record levels. New signed contract volume: down across all markets - He said contract activity had been slowing since late March/early April. Price adjustment lag: about 15-16 months nationally - Average time for sellers to capitulate, according to Miller’s experience. Inventory in his Connecticut town: 200 pre-pandemic listings -> 50 after pandemic -> 12 before rate hikes -> 50 after quadrupling - Illustrates the collapse and partial recovery of supply. Manhattan rent (median): $4,000 - Crossed the $4,000 threshold for the first time in history. Manhattan rent (average): $4,975 - All-time record average rent, near peak leasing season. Urban office vacancy: about two-thirds empty - His estimate of New York office towers' occupancy during the period. Southern California above-ask closings: about 65% on average - Proxy for bidding wars in early-year data from Los Angeles to San Diego. Fairfield/Westchester/Long Island above-ask closings: 45% to 55% - Another high-demand suburban ring around New York City. Zestimate median accuracy (listed homes): within 2% - Half the time, when the property is currently listed for sale. Zestimate median accuracy (off-market homes): within 7% - Accuracy falls materially when the home is not listed. Appraisal industry size: about 75,000 appraisers in the U.S. - Miller contrasted this with about 1.5 million real estate agents. Real estate agent count: about 1.5 million - Used to show the industry’s weak lobbying power relative to agents. Appraisal industry diversity: 98% white - He cited BLS rankings showing the appraisal industry dead last in inclusion of women/diversity. Luxury sales threshold: $50 million+ - He tracks residential transactions nationally above this level. 2021 ultra-luxury sales: well over 40 transactions - He said 2021 was the biggest year by far for $50M+ residential sales. Florida ultra-luxury sale: $175 million - A transaction closed in Florida during the week of the interview. Office rent impact: 30% to 50% hits - His estimate of effective rent pressure once concessions and free rent are included.

Pivotal Quotes: "The cure for high prices are high prices." — Jonathan Miller: Explaining why housing demand cools when prices and rates rise enough to hurt affordability. "It takes an average nationally about 15, 16 months, but call it a year to year and a half, two years, sort of, it's not a couple of months." — Jonathan Miller: On how long it takes sellers to accept lower market prices. "The market is the market." — Jonathan Miller: On co-op boards and others trying to resist real market-clearing prices.

Implications: Expect a slower housing reset rather than a crash: affordability, not just rates, will cap demand. Cities should remain vital, but commercial office distress will linger. Appraisal and valuation will stay contested as automation and regulation evolve.