Matrix Blog

Amenities, Adjustments & Value Logic

Should We Adjust Housing For Inflation?

February 4, 2013 | 1:27 pm | | Charts |


[click to expand]

I’ve inflation-adjusted housing in some of my charts over the years but it always felt like a double dip since housing is a huge component (42%) of the measurement of inflation.

The issue came up again with last week’s excellent WSJ article on our Manhattan housing figures – adjusted for inflation, housing prices were equivalent to 2004 levels and not adjusting for inflation brought prices to 2006-2007 levels. So I reached out to my friend Jed Kolko, the Chief Economist and Head of Analytics at Trulia who had some thoughts about the issue.

[Jonathan] Is it appropriate to inflation adjust housing prices? I don’t see this done all that often and always wondered if it was appropriate since housing prices (i.e. rental equivalent) are a huge part of the inflation calc?

[Jed] You’re right, that housing prices are an important part of inflation, so it’s a little odd to deflate housing prices by a measure that includes housing prices.

[Jonathan] So when would it be appropriate?

[Jed] The context when it does make sense to inflation-adjust housing prices is when looking over a very long time horizon – like decades – when dollars clearly meant something different than today. In particular, analyses of home prices versus price changes of other assets (like equities) are often (and should be) inflation adjusted in order to show the real return on investment.

[Jonathan] So when would it not be appropriate?

[Jed] The context when it’s definitely not appropriate is when comparing home prices across different cities/metros/regions. Measures of local inflation are hugely driven by home prices, and even local differences in the prices of other things, like restaurant meals or haircuts, are driven largely by local differences in real estate costs. Inflation-adjusting when comparing local home prices is a case of dividing something by itself. The better way to compare housing prices across metros relative to spending power is to divide home prices by income or wages. I did exactly that in this post, as a measure of affordability.

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Valuing A Fireplace

February 3, 2013 | 10:00 am | |

A few weeks ago I provided some logic to Jhoanna Robledo at New York Magazine about valuing a fireplace. She’s just as interested in quantifying amenities as I am and has written some fun pieces on valuing various amenities using my logic. Floor level. Outdoor space. Light and Views.

She distilled down the ±90 minutes of discussion on the hot topic…and remember when it comes to valuation logic, one size doesn’t fit all. My approach came from 26 years of valuing thousands of co-ops, condos and townhouses in NYC but the same logic could very well apply to other markets.

In a study of Manhattan sales that appraiser Jonathan Miller made with researchers from NYU’s Furman Center for Real Estate and Urban Policy, apartments with fireplaces cost an average of about 10 percent more than those without. (The difference was 11.4 percent in condos, 9.7 in co-ops.) But the fireplace is “part of a suite of amenities” not easily parsed from other prewar features like high ceilings. Miller estimates that the fireplace itself adds 2 to 5 percent to the price. That’s a fairly wide range, depending majorly on placement: A mantel in the center of the living room is worth a lot more than if it’s in a back bedroom. And if the fireplace doesn’t work, or the flue needs more than a cosmetic touch-up? That cuts the value by half.

Think yule log.

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Reverse Polish Notation Refresher: HP12C Video For Real Estate

January 9, 2013 | 10:14 am |

Bruce Kirsch over at REFM Blog posts a view worthy class on the stalwart of real estate calculators, the HP 12C.

Here’s my sentimental look at retiring my old HP12C.

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[Case Shiller] Recovery Is Back In Season

December 27, 2012 | 7:00 am | Charts |


[click to expand chart]

Well the frequently maligned but most influential housing metric was published yesterday, the S&P/Case Shiller Home Price Indices and the 20 City index rose 4.3% year-over-year. The only two “regions” to see declines were Chicago and New York.

Baseball Correlation? Chicago and New York are the only 2 cities who also have 2 Major League Baseball teams. No, Los Angeles doesn’t have two MLB teams…the Los Angeles Angels of Anaheim are clearly trying to have it both ways.

But I digress…

With all the talk about “recovery” (aka happy housing news) these days it just dawned on me that since 2000, the Case Shiller HPI only began to show significant seasonality since mid-2009. No one has really talked about this and I’m not sure what it means, but it just jumped out at me today.

Pre-peak housing prices fueled by falling lending standards and the seasons were largely crushed by the locomotive known as the housing boom. Therefore the seasonally adjusted and non-seasonally adjusted price trends were virtually the same during the market’s ascent. I distinctly remember real estate agents commenting during this period that the seasons were going away and housing market patterns were changing permanently.

Post-peak housing prices After the plunge subsided in mid-2009, the market began to ebb and flow with peaks in the spring/summer and troughs in the fall/winter.

Note to self
The next time CSI prices begins to smooth into nothingness, perhaps it’s a housing boom, baby.

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Valuing the Light in Your Condo or Co-op

December 3, 2012 | 11:05 am | | Favorites |

Jhoanna Robledo over at New York Magazine squeezes light from my proverbial turnip and the result is a very cool graphic on one way to value light in an apartment in her piece “What’s the Price of Light?” The topic of view have been recently explored and floor level.

Light is perhaps the most subjective of the view-floor level-light trio but this is the logic our firm has used for years (based on the “paired sales” theory that isn’t very practical in an appraiser’s daily life) but I feel it’s a good starting point, and of course it depends on the nuances of each situation.

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Central Park Views Before and After One57

December 3, 2012 | 9:00 am | |

A lot is being made about the value of views these days.

The law of supply and demand is also in force. “If you look at the number of buildings that have a view of Central Park and you look at the shoreline of Manhattan,” Mr. Miller said, “the waterfront is a lot bigger. There’s a much more exclusive nature to having a park view.”

You can be on a very high floor and still lose a significant part of your view amenity as the following photos indicate. Views are nearly always discussed in the context of what is gained rather than what is lost. In NYC, no view is ever guaranteed. These were taken by one of my appraisers from the same spot from a high floor on a building across the street looking directly north over Central Park before and after One57 topped out.

Before

After

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Knight Frank Tall Towers Report Shows London With Similar Manhattan Height Premium

November 6, 2012 | 10:00 am | | Reports |

Knight Frank released their new report exploring the floor level premium in London’s high-rise residential developments with the coolest report name ever: Knight Frank Tall Towers Report 2012

While NYC has a taller residential housing stock than London but the premium per floor is similar. London shows a 1.5% increase in value per floor. My rule of thumb for Manhattan has been 1% to 1.5%, but closer to 1%. However we treat floor level as a different amenity than view and that’s probably the reason for the slightly larger adjustment in London. What’s particularly of interest is how much more the per floor cost of development is for higher floors:

Net to gross area ratios in tower schemes are lower, since the percentage of space taken up by the cores and service provision areas are comparatively high. This means that the effective revenue-generating 43% Uplift in construction costs per sq ft between the 10th and 50th floor.

I’ve explored the subject myself in New York Magazine and The Real Deal Magazine.



Tall Towers Report 2012 [Knight Frank]
Manhattan Values By Floor Level [Matrix/New York Magazine]
The cost of a view [The Real Deal]

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9 Feet Under: Some Thoughts About Valuing Basements and Cellars

June 22, 2012 | 2:16 pm | |

I’m not sure what’s in the water these days but I am receiving a growing number of emails and calls about the valuation of basement space from real estate agents so I thought I collect my thoughts and cobble together a post to point people to.

First, a few definitions for the sake of clarity and in order of depth:

At Grade Ground level
English Basement Brownstones in New York City (and perhaps elsewhere) where the first floor is partially below grade on the street side of the building and opens at grade in the rear.
Basement The area underneath a building that is partly or fully below grade.
Cellar Usually the lowest part of a building. Located below an English Basement
Sub-Cellar Rare but when exists it becomes the lowest part of a building. Located below a cellar.

The valuation of below grade space, whether its a co-op, condo or house uses the same principals we use when appraising outdoor space. I see it as an amenity “add on” because not all properties have them.

When appraising, we attempt to establish the value of the above grade space on a per square foot basis. The below grade space, ie a basement or cellar, can be viewed as a portion or percentage of the value of the above grade space – “cents on the dollar”. In other words, the value of basement area is proportional to the value of the residence that sits above it. It’s worth more in a home that is of high value than a home with a lower relative value.

“Technically” Below Grade, The “English Basement”
Many of the old brownstone floorplans in NYC public record refer to the first level as the “basement” and the floor below it as the “cellar.” That is because many brownstones were constructed with a stoop from the street to the “parlor” (2nd) floor which was the entertaining space with the highest ceiling height and most decorative detail. The first floor is usually a few steps down from the sidewalk yet it opens at grade to the rear and contains the kitchen and has the same finishes and ceiling height as the upper floors of the building. Market participants see English Basements as equivalent to the above grade space and therefore it should be included in the square footage. Here’s a recent Q & A:

Question is it legal to count basement space as part of the sq. footage when selling a town home? This particular house has a 9-ft ceilinged finished basement but no windows. My buyer wants to know for resale purposes.

Answer For suburban homes, a traditional basement is below grade and would not be included in overall square footage even if it is finished and has rooms. In NYC brownstones, the same rule applies EXCEPT a basement could be included if it is a few steps below grade in the front and opens at grade in the rear (aka “English Basement”) AND the space has the same finishes, ceiling height as the floor above and includes a key room like a kitchen. If the space isn’t considered the equivalent to living area on the floor above it is NOT included in total sq ft but adjusted for separately. In the case of a brownstone with an “English Basement”, the space below is referred to as a “cellar” and is never included in the sq ft.

Condos and Co-ops With Basements
Many ground floor loft and non-loft apartments and tenement walk-ups have direct access to the building basement. I can’t tell you how many wrought iron circular stairways I walked (aka squeezed) down while appraising ground floor co-op walk-ups with below grade space during the 1980s co-op conversion boom. It was a great way for developers/sponsors to maximize the value of underutilized space, calling them “recreation rooms” even thought they are used as bedrooms. Here’s a recent Q & A:

Question I’m the sellers broker for a ground floor duplex loft space. We are currently in contract and we marketed the space as a one bed because the lower level is used as just that. The lower level is beneath ground without windows. The appraiser tells me that the C of O for the space calls for the lower level as a recreation space not a bedroom. Should this have a significant impact on the value of the apartment. Can’t is be viewed as loft space, period. Thank you for any insights you may have.

Answer Technically, the below grade area shouldn’t be called a “bedroom” and the sqft should not be included in the total sqft in an appraisal. However it contributes value and is handled as a separate line adjustment in the appraisal. The value of the space is usually something less than the ppsf of the ground floor if there was no basement. That applies to room count as well. The logic follows that if this space was a 1st and 2nd floor duplex instead of ground floor + basement, it would be worth more, everything else being equal. I’m not sure about “significant impact” but it makes it worth less than a fully above grade similar sized space. If the selling price is consistent with that relationship of competing properties, then there should be no problem with purchase price. The appraiser problem is really what you are referring to. Unfortunately, there is nothing you can do at this point since they have already inspected the property and are impossible to contact. Hopefully it will work out.

How Appraisers (Should) Handle It
As a rule, ie Fannie Mae guidelines (page 564), appraisers can’t include below grade space in the total square footage of a building (or the room count). In other words, the location, quality and configuration of the space is viewed by consumers as something less than above grade space in the same property.

Here’s Fannie Mae’s take (May 2012):

Basement Sleeze During Boom
During the housing boom when banks and mortgage brokers (well, really everyone) lost their minds, it was quite common for unethical appraisers, working in conjunction with mortgage brokers or lenders, to include basement space in the square footage because the space opened to grade in the rear of the house and was finished. A 2-story house that was 2,000 square feet when purchased, suddenly was 3,000 square feet when subsequently refinanced.

The Math (Market Derived)
Here a some possible ways (there are always exceptions and outliers) to approach the valuation of below grade space (in order of literal depth):

English Basement No adjustment – I’ve never observed an impact on a brownstone’s “English Basement” square footage – it is simply part of the gross building area of the brownstone.
Basement 50%-75% of the above grade ppsf – In our NYC experience, below grade space, whether it is within a brownstone, co-op or condo, their basement areas are often worth 50% to 75% of the above grade space on a per square foot basis. In a typical suburban detached house, the value is often worth less than that.
Cellar 50%-75% of the above grade ppsf – A NYC cellar (located below an “English Basement”) is handled same way an actual (i.e. suburban) basement is, something like 50% to 75% of the above grade space because it is basically the same thing.
Sub-Cellar 20%-35% of the above grade ppsf – A sub-cellar (usually located below the cellar located below an “English Basement”) is usually valued at 20% to 30% of the above grade space but this obviously depends on what the market data shows.

That’s all the dirt I can think of. Hope this helps clarify things.


[Terra Logic] Understanding The Value of Manhattan Apartment Outdoor Space [Matrix]
Fannie Mae Selling Gude “Appraisal Guidelines” [eFannieMae]

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[ChartFloor] Manhattan Price Per Floor Breakdown

June 9, 2010 | 6:18 pm | | Favorites |

trdfloorlevel

Floor pricing has been the stumbling block for credibility with automated valuation models (appraisal replacement tools) used by banks and for services like Zillow. StreetEasy gets it right, in the way they display information – grouped by building so the patterns are apparent.

Matthew Strozier over at The Real Deal Magazine asked me to crunch apartment prices to show some sort of floor level relationship to value. I took the down and dirty approach (because SPSS is way over my head) and looked at all closed co-op and condo sales in 2009. I broke those sales down by floor level and crunched the metrics for each floor. The results are seen in this very cool chart. Click on the graphic to the right that TRD created to open the big version.

  • First Column – % share of units on that floor compared to all sales in 2009
  • Second Column – floor level
  • Third Column – Average Price per Square Foot of all sales in 2009 on that specific floor.

Some observations

  • 1st floor – 19.3% jump to second floor reflecting concerns about security, privacy and noise levels.
  • 2nd floor – 11.4% jump to third floor reflecting concerns about security (scaffolding), privacy and noise levels.
  • 7th floor – jump reflects penthouse and roof line breaks from adjacent 6 story buildings.
  • 13th floor – data suggests only 18.4% of buildings with a 13th floor actually call it that.
  • above 13th floor – market share declines with height, reflecting fewer apartments and the floor level price per square foot continues to rise.

In addition, the erratic price per square foot patterns on the higher floors reflect the differences in views. In our appraisals were make adjustments for floor level and view separately.

I ended the presentation at the 25th floor only because the data set gets so thin that it was more difficult to extract or infer a pattern.

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[Terra Logic] Understanding The Value of Manhattan Apartment Outdoor Space

May 5, 2010 | 9:19 am | Favorites |

terralogicimage

Through the process of valuing terrace space in Manhattan since the mid-1980’s we developed a logic or valuation methodology for this amenity. I am asked to explain the process several times a week and it finally dawned on me to write about it (I can be slow to the draw sometimes).

BACKGROUND
Back in the mid-1980’s when we began our company, attempts to value terrace space by the real estate community (appraisers and agents) was approached as a lump sum dollar value rather than establishing a relationship with the value of the interior space of the apartment itself (ie that particular terrace is worth $50k) which I derided as the PFA (pull from air) approach.

Outdoor area was valued quite primitively as fixed asset, with little consideration to variations in size (other than “small” and “large”) and its relationship to the apartment it was attached to (the same logic was incorrectly used with roof rights). We would see large terraces attached to one-bedroom apartments treated the same as if it were attached to a 12 room apartment. Crazy.

In fairness, this “terra logic” wouldn’t have been possible without the evolution of price per square foot as a core price metric in Manhattan. Market participants were talking and thinking about it but it wasn’t formally analyzed. We were the first appraisers to introduce price per square foot for co-ops in our appraisal reports by presenting all sales within the building to bracket the price per square foot of the subject apartment, and the first to introduce it into our market reports as a formal analysis. It was difficult because square footage is not a matter of public record and most co-op listings did not include square footage. We had amassed the information during our normal course of business.

Gotta love the completely ridiculous valuation metric “price per room” which admittedly we used in the early 1990’s in our first market reports until it morphed into price per square foot. Incredibly, price per room is still presented today. Imagine a buyer telling a broker “I won’t pay a dime over $135,000 per room.” Good grief.

Valuing Outdoor Space

METHODOLOGY
We have found that a ppsf analysis on finished terrace space is generally a reliable form of valuation to determine what the terrace area contributes to the overall value of the apartment being appraised. Its a relational value – if the apartment is worth more, that carries over to the outdoor space. This logic applies to patios, garden areas and balconies. Doesn’t matter whether it is a co-op, condo, highrise, lowrise or brownstone.)

Here’s how

  • Estimate the ppsf of the property without the terrace
  • The general relationship between finished terrace space and interior space – terraces are typically valued at 25-50% of the ppsf of the interior space.

For example – if the interior space was worth $1,000 psf, without considering the terrace, the outdoor space could be worth as much as $500 psf (50% of interior ppsf). If the terrace is 500 sqft, the terrace could be worth $250k ($500/sf x 500 sq ft).

That’s the basic idea. Simple. Of course there are many other factors such as:

Utility

  • Depth – a 500 sq ft could be a deep terrace or a shallow 2 ft deep wrap around – same sq ft but different value.
  • Location – a 2nd floor terrace overlooking a busy north/south avenue has more noise and soot as well as a lower perception of security
  • privacy – space that is not formally separated from the adjacent apartment terrace space has lower value
  • Obstructions – such as a parapet that blocks the view from the terrace. View itself is NOT a terrace amenity since it is considered in the ppsf of the apartment. A skylight or risers are usually deducted from the square footage.

Size

  • Oversized space – if the terrace is greater than 50% of the interior space, the ppsf contribution falls off considerably for the additional space over the 50% threshold. For example 700 sq ft 1-bedroom apartment with a 3,000 sqft terrace – only about 350 sq ft has any meaningful value (of course, if the maintenance charges reflect the entire terrace, any value of the terrace would be wiped out.

Association

  • Primary amenity – The patio or garden in a ground floor brownstone or apartment – use the same logic as when considering a terrace in a penthouse apartment.

Comparing apartments with and without outdoor space

One of the reasons penthouse or any apartments with significant outdoor space sell for a higher price per square foot is that the sq ft denominator in the price per square foot equation only considers interior square footage. To create more parity between the two types of apartments for comparison purposes, calculate the adjusted price per square foot of the apartment. In order to do that you need to theoretically convert the outdoor space into interior space.

In the prior example, we said the terrace was worth 50% psf of the of interior space ($500 v. $1000). Use the same relationship with size and give the space full credit for interior space by taking 50% of the terrace space (500 sqft x .5 = 250 sqft) and add it to the existing interior square footage: 1,000 interior square feet + 250 interior square feet representing 500 square feet of terrace = 1,250 adjusted square feet.

This makes it easier to compare units with and without terraces and is predicated on the whether your % discount assumption for your exterior space is correct.

UPDATE (May 17, 2016): Although I wrote this post almost exactly 6 years ago, it still represents how my firm and I approach the valuation of outdoor space in New York City. It has been a thirty year run – using the methodology I created in the 1980s that still reflects market conditions today. One new observation – we have seen developers of a few luxury condominiums attempt to market outdoor space square footage on par with the interior price per square foot of the adjacent unit. While there was some random traction a few years ago, it was not adopted as a market wide pattern. Given the current slowdown in the absorption of high end condos, I have not observed this pricing strategy under current conditions and believe it won’t be used going forward. Of course if I observe a market-wide change, it will be chronicled here.



Disclaimer: No comments by an appraiser would be complete without a disclaimer. It is important to note that these are only rules of thumb to guide you – the value of a terrace is not formula driven – these relationships are developed from market data and can vary significantly depending on the combination of amenities and time. If you are unable to grasp this, close your eyes very tightly, think about a cool ocean breeze on a warm breeze sandy beach, while holding a large set of perfect comps, until memories of this post fade completely away.


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[Central Park v. Detroit] $363,538,692,000 v. $4,500,000

October 26, 2009 | 11:57 pm | |


Source: Google Earth

Back in 2005, I did a fun exercise for New York Magazine – I was asked to value Central Park (just for fun) in about 3 minutes. It was within an article that ranked the reasons to love New York and was item number 3.

The New York Observer recently asked me to update this calculation using the same methodology (in 3 minutes and just for fun) and I came up with $363,538,692,000 which is a far cry from $528,783,552,000. The same disclaimers apply as the original effort, seriously.

To put this in perspective, about 9,000 Detroit properties were auctioned (hat tip WalletPop) with opening bids of $500. Only 20% received bids. The total land area of these properties was equivalent to Central Park. If all 9,000 properties received a bid of $500 (which is probably not far off if you assume the 20% that received bids were over $500 and the rest $0), that represents a total value of $4,500,000.

Thats’s not much of a value and these properties also pull down values around them – plus they are off the tax roll placing more financial burden on existing properties.

Not a good sign
Most of the bidders were investors and vacant land in Detroit equals the entire footprint of Boston.

As much as I love my time spent in Michigan and my relatives there, I believe this is called an economic failure spiral.


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[The Hall Monitor] The Argument For Seasonal Time Adjustments

May 12, 2008 | 3:59 pm |

Todd Huttunen began appraising more than 20 years ago with a few years off in between to pursue a career in cabinet making. He relegated that to hobby status and is currently an appraiser in an assessor’s office. His best friend dubbed him The Hall Monitor because of his rigidity and respect for rules. He offers Soapbox readers tongue-in-groove insight on appraisal issues.

This week Todd adds some seasoning to the time adjustment concept.

…Jonathan Miller


Here is a comment you will find in many residential appraisals “A lack of more recent sales required the use of sales which are more than six months old”. The apologetic nature of this comment implies that “recent” (meaning sales occurring within six months of the valuation date) are always better indicators of value than those which took place more than six months prior. The “logic” of using the most recent sales available would be sound if market conditions (i.e. price levels) changed on a straight-line basis over time as opposed to on a seasonal basis. But in many, if not most, residential markets that logic is flawed and the six month “guideline” should be thrown out.

The graph below is from the Westchester County Board of Realtors Sales Stats and it clearly demonstrates that for single family houses in Westchester County selling prices in the second and third quarters were significantly and consistently higher than in the first and second quarters over the last five years. Property values did not increase in a straight line with prices every month higher than the month before. Even during this “boom” market, prices went up AND down during the year depending on the season.

The seasonally based serpentine line of one quarter followed by the next straightens out remarkably if you connect the dots from first quarter to first quarter, second quarter to second quarter, etc. Any adjustment for market conditions must be based, first and foremost, on seasonal differences between the valuation date and the dates of the comparable sales. The appraiser must also consider that the “meeting of the minds” between buyer and seller precedes the closing date by sixty days give or take, and comparable sales should, to the extent possible, reflect similar seasonal conditions. If the subject property is being valued as of June 1, 2008, I would argue that in terms of market conditions, the sale which closed August 1, 2007 (ten months old) is a more reliable indicator of value than the one which closed February 1, 2008 (four months old).

So the next time your client insists on your using more “recent” sales, take the opportunity to explain the seasonal fluctuations in selling prices (if indeed they occur in your area) in defense of why your ten month old comparable is more reliable than the four month old sale you didn’t use.


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