Andrew Siff, a reporter for WNBC Channel 4 in New York did a great job articulating the tight inventory phenomenon we are seeing in both the region and nationally.
Andrew Siff, a reporter for WNBC Channel 4 in New York did a great job articulating the tight inventory phenomenon we are seeing in both the region and nationally.
I was speaking at the New York Real Estate Bar Camp recently and asked the audience what to call the state of housing market right now, since I objected to the use of the word “recovery” and “a period of better stats without underlying fundamentals” wasn’t catchy. Philip Faranda came up (more like shouted out) a brilliant suggestion. We’re in a “Pre-Covery!” I loved it and it stuck.
I thought about the new word when I read a great Robert Shiller piece in the New York Times this weekend called: A New Housing Boom? Don’t Count on It.
Shiller questions the substance of the happy housing news we’ve all been reading about:
It’s hard to pin down, because nothing drastically different occurred in the economy from March to September. Yes, there was economic improvement: the unemployment rate, for example, dropped to 7.8 percent from 8.2 percent. But that extended a trend in place since 2009. There was also a decline in foreclosure activity, but for the most part that is also a continuing trend, as reported by RealtyTrac.
What’s missing from all the metrics being tracked and discussed is sharply falling inventory – that’s what is driving prices higher even though little else has changed.
The reason for falling inventory? Sellers, when they sell, become buyers (or renters) and with >40% of mortgage holders having low or negative equity, they don’t qualify for the trade up. We have been so focused on negative equity that we’ve paid short shrift to the impact of low equity.
Not only don’t many sellers qualify – they simply aren’t under duress i.e. they haven’t lost their job, don’t need to move, etc. so what will they do when they realize they don’t qualify?
They expect/hope hope the market improves eventually.
This has created yet another form of “shadow inventory.”
Although I certainly agree that the long term trend of mortgage rates doesn’t really correlate with housing prices since rates have been falling for years, weak employment and personal income are not justifying the last 6 months of housing market improvement.
I see falling mortgage rates as simply keeping demand steady (but rates can’t fall much further) and falling inventory is either pressing prices higher or to stabilization depending on the market.
Here is a simplistic generic but typical scenario in most of the markets I follow over a 2 year window:
In this scenario the rise in sales is NOT working off inventory – the math doesn’t work so something else is in play – low or negative equity is choking off new listings entering the market against steady demand caused by falling rates.
Since low inventory is not a local market phenomenon but is happening in nearly every housing market I can think of (sales rising modestly and listing inventory falling sharply) it makes this a credit phenomenon. I like to say “housing is local but credit is national.”
To make this discussion really crazy we could even say that tight credit conditions are actually prompting the pre-recovery something that on the surface is very counterintuitive. But in reality, tight credit is choking off supply and low rates are keeping demand constant. Then prices rise.
The New York Times Real Estate goes gonzo this weekend with a nice write-up AND a large color artwork on perhaps the least understood part of the home buying process.
No not the radon test…
The appraisal. Can’t live with them, can’t live without them.
Here’s my stream of consciousness on the topics brought up in the article:
“You have a better chance of winning Powerball than getting a lender to abandon the first appraisal.”
Understanding the Home Appraisal Process [NY Times]
I few weeks ago I was dressed down by an analytics friend of mine who is in the business. Based on his employment and housing sales analysis in Alabama (I’ve never been) he suggested my comments about mortgage rates influencing housing prices as anecdotal and hypocritical (who says analysts have to have tact) – that only employment can be correlated. And further…since mortgage rates can not be proved to influence housing sales through multiple regression, any such claims are hearsay and anecdotal. While I agree that housing’s largest influence comes from employment, I was a bit surprised by the out-of-left-field agita I inspired.
He was focused on the predictive element of a trend versus a knee jerk reaction to a sudden change in a metric. My comment about a spike in mortgage rates at this moment (not predicting it) as ending the party – is apparently what caused him to lose faith in my analysis. Appreciative of the constructive feedback, I whipped up a couple of US macro price charts.
Yes, US employment trends correlate with US housing prices and mortgage rates correlate by showing an inverse trend against housing prices.
Predictive? Only if considered with other metrics.
The August 2012 issue of Money Magazine on the newsstands now has a nice article penned by Ali Rogers called “Think Like an Appraiser.”
It’s not available online yet but the magazine is always a good read. Although Money Magazine has named me “Best Online Real Estate Expert,” I swear I have offline expertise too.
Ok before you go on with snarky comments about the last appraiser that screwed up your deal, I’ve heard it all before, much of it spoken here on this blog. The article is more about the concept of “contributory value” – how certain modest improvements help provide additional value of your home. In theory, an appraiser is going to walk through your home at time of sale just like your buyer would and place a certain value on things you may have done to improve the property. First impressions are important in building a sense of value for the property.
I’d like to expound on the contract “data” point in the article to provide context (not something I commented on for the article). Appraisers absolutely consider contract data in addition to closed data (and listing data). We can place them in the report but normally are not the sole basis of determining value.
What often happens is that we are told about a home that is under contract nearby but we don’t know the sales price. We will call the listing agent of that “contract” and try to get a sense of the interior condition and the actual price (99% of the time we are NOT successful getting the price) but we sometimes we might get feedback like “sold at list” or “sold very close to ask” etc. This can be a helpful gauge on value but not the key factor in the report presentation, especially since there is a higher probability in today’s market than in year’s past that homes under contract don’t always close.
These bits of info from a little detective work are among the subjective elements to valuation that help “tell the story” of the transaction. It’s not about dropping raw data on a spreadsheet and taking an average.
[Alvin “Chip” Wagner III, SRA, IFA, SCRP is third generation appraiser from Chicagoland who is a public figure and well respected within the appraisal industry. Along with his business partner, Bob Headrick, they run the firm Headrick-Wagner Appraisal Group, which has been providing appraisal, consulting and research services throughout the Chicagoland market for more than 35 years. I met both Chip and Bob through RAC (Relocation Appraisers & Consultants). When I met Chip in the late 1990’s we both spoke together at a national conference about our appraisal web sites, both among the first in the country. I have learned a lot from Chip and I am thrilled to use his firm’s market stats on my Matrix blog and post his Chip Shots column on Soapbox. Like me, he has an enthusiasm for market analysis.
In this week’s Chip Shots column, Chip shows his annoyance with the “dumbed-down” check box appraisal culture and elaborates on one of critical measures of being good appraiser: having the ability to accurately measure the property he or she is appraising.
All appraisers have been taught how to calculate Gross Living Area. Often times mistaken with the term “square footage,” Gross Living Area it a very important component in real estate appraising, but is often overlooked and rarely challenged for accuracy.
As defined by the Appraisal Institute’s Dictionary of Real Estate 4th Edition: “Gross Living Area (GLA) – The total area of finished, above-grade residential space excluding unheated areas such as porches and balconies; the standard measure for determining the amount of space in residential properties.”
What has been bothering me in recent weeks? Today it is the appraiser who cannot measure. I have been challenged 5 times in the past week on my measuring ability. I have been right on every appraisal, and I’m getting tired of this trend. This is high school geometry, not physics or engineering. Please understand, I admit to making mistakes and am far from perfect.
I was brought up in this business during a time where we didn’t have APEX, Win-Sketch and the sketching programs out there. I had the graph paper and architectural rulers and drew floorplans and manually calculated my Gross Living Area.
If you are doing residential appraisals only for lenders, you are likely never challenged on how accurate you can measure a home. You go about your business with your tape measure, Roto-wheel, or laser device, while others just may be lazy and use the survey or blueprints and don’t measure anything. Not even a spot-check against that survey.
I specialize in corporate relocation appraisals. This is a niche in the residential appraisal profession when a corporation or the government transfers one of its home-owning employees. Two “relocation” appraisals are averaged together to form a buyout offer to purchase the home of a corporate transferee.
When doing this type of work, the two appraisals have to be within 100 square feet of each other. This is a reasonable request, given one appraiser might round up or down a couple of inches, or measure an open two story foyer differently by a couple of inches.
But more and more often, I am hearing: “you and the other appraiser both measured the subject property, yet you are 250 square feet apart.” (Not on a 5,000 square foot home, but on a 1,900 square foot home, mind you). So, you politely tell the reviewer that you will be happy to take another look at your measurements, and would also like to review the other appraiser’s sketch. This is common-practice, and I get to review a lot of sketches of my peers some good, some bad. A good reviewer will look at both sketches, find where the differences are and try to get to the bottom of it. A lazy or untrained reviewer will simply allow the appraisers to hash it out.
But the other appraiser sketches I have seen recently makes me really embarrassed for my profession. Pulling a tape measure isn’t a requirement for your appraisal license, it is just expected for you to pass high school math!
Some sketches are hand-drawn and have simple multiplication errors. Okay, it happens if you are living in the 1980’s. Use your appraisal software with the sketching programs. If you are using a computer but still hand drawing your sketches and scanning them into your reports, take a few minutes to learn how to use these programs the are great and once you learn to use them, they are accurate 100% of the time.
Other discrepancies might be the other appraiser misses an “overhang” or a cantilever. Although I strive for perfection, I have been known to miss that one from time to time. Nobody is perfect all of the time.
One of the more common problems I see is measuring open areas of two story foyers. Did you know that the first stair tread is considered part of the second floor? Stupid as it sounds, that is one of the most common mistakes an appraiser makes. Approximately half of the appraisers measure by removing the entire open foyer space, the other half measures correctly around the stair treads. Assuming that an average stair width is 3.5′ and 10′ long, this can change the sketch by 35 square feet. Not a big deal? It is when the two appraisers GLA’s are different by 125 square feet. Measuring the foyer properly will bring the difference to less than 100 square feet, and no calls and exchange of sketches will be needed.
Another common problem I see is the other appraiser rounds up or down to the nearest half-foot, or even the nearest foot. Again, the guidelines for calculating Gross Living Area requires the appraiser to measure to the nearest inch or 1/10 of a foot.
How about dormered areas on second floors ever heard of the 5′ rule? At least half of the appraisers competing with me for relocation appraisal work apparently have not. Gosh, I’ve even seen some appraisers swear that a cape cod without dormers is measuring the first floor and multiplying by 1.5; and if there are dormers, you multiply by 1.6; and if there is a shed dormer, you multiply by 1.7.
Then, there are renderings that don’t even look remotely like the house. I can recite many sketches where one appraiser calls a wall a 50′ straight wall on the rear, yet there are clearly bay windows, 3′ extensions, and enlarged and extended rooms. Hey, if you are using that survey, it probably only gives the dimension at the foundation, not any siding that goes over the foundation.
And by the way, never trust the blueprints or the survey I see errors all the time. Blueprints often change during construction. They are a great guide, but spot-check them on at least 50% of the dimensions. And the survey? I have a collection of inaccurate surveys as well. I suspect most are typographical errors in this case, but surely don’t rely upon someone else’s calculations. Again, spot check that survey before you leave the property.
You don’t believe me? What are these “guidelines” I am referring to? Yes, there is a guideline for calculating the Gross Living Area. Check out the ANSI guidelines (American National Standards Institute and purchase the “Method for Calculating Square Footage” guideline ANSI Z765-2003. The original standard was developed in 1996 and adopted by dozens of organizations including appraisal associations, builder associations, National Association of Realtors, Fannie Mae, Freddie Mac, and ERC to name a few. Updated recently in 2003, the standard describes the procedures to be followed in measuring and calculating square footage of detached and attached single-family homes. It is the purpose of this standard to describe a method of measurement that will make it possible to obtain accurate and reproducible measurements of square footage in single-family homes. The ERC Relocation Appraisal Guide, the book describing how to complete a relocation appraisal, has instructions following these guidelines.
Our profession continues to be “dumbed-down” by box-checking forms, and accurately measuring a property is quickly becoming a lost art. In the Sales Comparison Approach, the GLA is obviously an item of comparison. The Cost Approach seems to not be relevant to anybody anymore (another Blog topic), but if you don’t measure the home accurately, your Cost Approach to Value will be flawed. And although the Income Approach is seldom considered appropriate in residential appraisals, if it is relevant, you better accurately measure the home to apply to the Gross Rent Multiplier.
A final thought, not only will mis-measuring a home lead to a flawed value through any of the three approaches to value, it could lead to a lawsuit down the road for the appraiser. Take a few extra moments to make certain you are doing the job right.
Chip Wagner’s field measuring tools include: Leica Disto Classic 5A laser measuring device, 3′ tape measure on a keyring attached to the Disto, Laser Shades (for the bright sunny days), “Rite-in-the-Rain” paper (for those rainy days), 7-inch pocket size angle tool (for homes that are not square), legal-size clipboard with one-inch hash marks carved into the underside (old-school trick I learned from my father), Lufkin 100′ fiberglass open-reel tape measure (collecting dust) and a Rhino heavy-duty six-foot flexible fiberglass folding engineer’s ruler (my retired appraiser-father’s tool of choice, not used in 2+ years).
In the article Do you see dead people? Disclose it [Realty Times] Most states’s disclosure laws don’t deal with the forms the deceased take in the afterlife, but they do address death as a stigma. The one exception is death caused by AIDS. Federal law define’s AIDS as a disability and such a disclosure could be deemed discriminatory.
Randall Bell, founder of Laguna Beach, CA-based Bell Consulting, which analyzes the impact of detrimental conditions on property values, says secrecy about specters and other conditions only adds to the fear. Public disclosure has a cathartic effect that helps remove any shroud of secrecy
I have spoken to appraisers around the country on this issue and I have been told some stories of tragedies in houses that have made my skin crawl. Its hard to believe that a buyer, after being told some of these stories, would not apply some sort of discount to the value. The difficult lies with supporting such an adjustment as an appraiser since these incidents (hopefully) occur few and far in between.
In a similarly titled article in Valuation Review About 30 states have specific laws on the books saying that agents and sellers cannot be held liable for not disclosing such nonmaterial, or nonphysical, “defects” about a house.
Depending on the status of the current real estate market, the stigma would fluctuate. It is unlikely that a murder or suicide, or rumors of a haunting in a house would not have an affect on the market value of the property. The Scott Peterson house sold quickly last year, but that may be due to the fact that the murder did not occur within the home and that the housing market at the time was very short of inventory.
In the late 1980’s we were familiar with a house in Manhattan where the owner murdered his family. This incident was discussed in the local broker listings and it was our feeling that the value was impacted by about 10% at the time. That discount may or may not be relevant today.
We have seen stigma adjustments quoted by other experts in other markets be as high as 30%. Quite often, the property is torn down and the land becomes the true asset in the transaction.
The new appraisal forms mandated by Fannie Mae effective November 1 will likely cause an increase in appraisal fees [MCall] because they will take longer to fill out and place much more liability on the appraiser for expertise he or she generally doesn’t have.
When Fannie Mae redesigned the forms, the appraiser’s role took on the that of a home inspector which is a different discipline that appraisers are not trained for.
The problem is the new forms are written in such a way that they hold the appraiser responsible for the condition of the property, says Barbara Decker-Spence, an appraiser in Allentown, who has led seminars on the changes for area real estate agents, lenders and appraisers.
”I am an appraiser. I am not a home inspectorand there’s a big difference,” she explains. ”Appraisers value the economic interests [while] home inspectors look at: Does the electrical system work? Does the plumbing work? Does the mechanical system work and are there structural issues?”
If report preparation takes longer and additional liabilities are being placed on the appraiser’s shoulders, it would then follow that the cost of doing business is higher. Appraisers in many markets could be expected to pass along the cost to their clients.
The New York Times approached our firm to provide some “war stories” about unusual property inspections. No names, just experiences. We had a bunch of fun jogging our memories. However, the writer decided to present the story from the perspective of real estate brokers [NYT] which was a fun read so I thought I would make my own fun and share a few stories from my staff and myself with you:
Michael J. Grassi
It was mid February and I was doing an inspection of a home. It was a very frigid day and I asked the owner if I could see in the garage. He was not all that happy about my request. I told him it was part of doing a complete inspection and he reluctantly opened the door. I came to find that there were two people living in the garage with no running water or heat. They were staying warm by using a Weber kettle grill and charcoal. They had cut a hole in the roof for a vent. Not ideal living conditions even by New York standards.
While doing an inspection in Jamaica, Queens I asked the owner if I could go down to the basement and if I would disturb anyone. No was the reply by the owner. I went down into the dark basement with only minimal light from a window. When, I reached the bottom step, I heard a growl and saw a massive head with two large orange eyes. As I slowly backed up the stairs heart pounding, sweat dripping, I got to the top step and asked what that was down in the basement. Oh!! the owner said casually, you mean our watch dog. This dog was a 180+ lb. Rottweiler, who looked very under fed. Thanks for the warning I said.
During an inspection of a multi-family dwelling I came across a most unusual sound. As I moved into the basement I noticed a foul smell which was pungent but not overwhelming. While in the basement I heard what sounded like a distant toilet flush from above. As I stood listening, I heard what amounted to the sound of a waterfall getting closer with a splash at the end. Apparently, there was a large hole in the sewer pipe and the waste water was dumping right into the basement, not ideal. The landlord who was with me was mortified. I needed a shower and shoe cleaning after that inspection.
I was appraising a museum and the summer intern took me around the place. I think it was in the fall and I decided to leave my jacket, bag and cell phone in her office. Just as we stepped out onto the roof, the door closed behind us and locked. . . We did find a set of stairs that led down to an enclosed alley, and the doors on each floor were locked. Finally, we got to the ground level and we started banging on the door quite loudly. It took a while, but security opened the door and said they were completely frightened by the noise.
I went to an inspection, the maid let me in. The husband had made the appointment. Both husband and wife were at work. The apartment was spotless and in beautiful condition. The wife calls the housekeeper by phone and asks to speak with me. Her first words are “Get the HELL out of my apartment. The maid hasn’t finished cleaning and its a mess”. I explained to her the apartment really looked fine and her husband had made the appointment. She said we’ll see about that…Then I had to conference call with the husband and the wife who continued to rant that I need to get out, her apartment wasn’t clean. When I hung up the maid said “You know she has a daughter. The daughter is just like her. You want some wine?”
Andrew L. Rogers
I went into an apt in Harlem. there were cages for large dogs, but no dogs and cats all over the place. the maid was there and said she didn’t know where the kittens were. we went down to the basement and in one room that was littered with debris there were flies buzzing all about, we assumed that the kittens were dead underneath the rubble.
Jonathan J. Miller
I met a couple on a very large property inspection that stayed with me (very much in my personal space) for the entire inspection, yet both screamed strong insults and innuendos at each other for the hour I was there while I kept saying “perhaps I should come back at a later time” or “please, I am having a hard time concentrating” hoping they would leave or stop, but they would both say “oh no take your time” seemingly oblivious of what they were doing to each other (and me). I called my wife after the inspection and told her I loved her.
I was given the keys to an apartment. When I opened the door, the apartment was completely dark. I thought I saw someone sitting on the couch so I called out “Hello”, but no answer. I finally found the light switch and saw a nude woman out of the corner of my eye in the mirror looking at me. I was startled but then realized it was a female mannequin propped up on the couch. I continued with the inspection, and was startled by yet another mannequin standing behind a door in a dark bedroom. I was definitely creeped out. When I called the homeowner later for info, I mentioned this to him and he laughed and told me their names as if they were real people.
At the end of the day, I had to inspect an apartment for an estate. The property seemed to be lived in with dishes in the sink, magazines strewn about. The apartment was very large and didn’t have a lot of natural light. It was getting dark and as I worked my way toward the rear of the apartment, I began to hear two men speaking very softly from the back of the apartment. I called out and the talking stopped for a few seconds. Then it continued. I became very uncomfortable and felt a chill down my spine. I called out again with the same result. I finally arrived at the rear of the apartment and found a small radio playing on the floor of a closed closet door. I finished up and got the heck out of there.
As a broker was taking me in to inspect a condo unit in a relatively nice building in Chinatown, he mentioned to me in passing “this apartment needs a little work.” He opened the door and the cigarette smoke was so thick, I could not see across the room. I literally had to duck down to see where I was going. It was a studio (one room) apartment and 6 chain smoking brothers were living there after their mother had died (it had been her apartment). There were about a half dozen cages with live chickens and all the walls were smeared with their mother’s feces as she had suffered from some psychological problems before she had died. Needless to say I didn’t touch anything and got outside as soon as I could.
This article, Measurements Amiss: Size matters–on your property tax bill struck a particular chord with me, both as an appraiser and a homeowner.
The square footage of properties found in assessor records may be well off the mark. Appraisers should use caution when pulling comps from town hall. Public records are not always accurate. After driving by the comp, if something doesn’t seem right, call the broker who sold the property (you should be doing this anyway).
Square footage is an important consideration for homeowners as well because it affects your tax bill. One of the easiest things to look at is the size of your home versus the size recorded with your town hall. Its a tangible amenity and much easier to make a case for getting your tax bill reduced. With the explosion of home additions, there is ample opportunity for errors in the tax records.
Although this pertains to a commercial building, there’s that old Manhattan joke that the “Empire State Building is more than twice as large as originally constructed.”
Concern over square footage doesn’t just apply to single family houses. Condos also see significant inconsistencies. The developer may include varying parts of the exterior space, such as a terrace, in the total square footage of the apartment, depending on the municipality. While such an amenity provides additional value, there is not an apparent standardization of how much, if any, of these sort of amenities. A small portion or all of this additional area may be included. We have seen condos that must have must have common area included in their gross living calculations. (Its a stretch, but I suspect that was intended to make the price per square foot value appear lower than competing properties.)
A below grade basement and attic space is usually excluded from square footage. However, there are exceptions. A prior home that I had owned was a Cape Cod style house that had been expanded several times that was lovingly called a “bastardized cape” in that particular market. At least 40 years prior, the attic had been converted to 2 additional bedrooms and a full bath as were most of the other capes in the neighborhood. A portion of this living area should have been considered as part of the square footage which seemed to keep our taxes low as compared to neighboring homes.
[Matrix] Length x Width Is Negotiable