And, looking back at 2011, I was pretty good as answering those questions. In March, I forecast a recovery in residential real estate for western Michigan that would take hold by the end of Summer. In September, the results were in confirming a recovery was indeed underway. Putting my money where my mouth was, I bought a house in Holland during the Summer- and while there is still pricing pressure in the market, supply and demand are at there most balanced levels in four years with strong new construction starts regionally. My purchase represents a three to five year commitment, then I will re-evaluate my lifestyle needs.

Also, I provided a couple of more technical appraisal economics posts for your consideration.

Lastly, EVERY post I published had valuable links- along with a youtube music video on theme. Can’t remember if I used “Burning Down the House” (Talking Heads) or not, but suspect that I was just that good!

Look for more timely and valuable posts on Michigan’s Real Estate market‘s in 2012…

Foreclosed homes listing and sales data is derived from Realcomp II, Ltd. multiple services database, and are deemed reliable – but not guaranteed.

Remember Last December...

Grand Rapids, the Holland Lakeshore area, Kalamazoo, Battle Creek, pretty much all of western lower Michigan, are six months into a real estate recovery… take a look for yourself!!!  Six months in a row of strong sales activity and declining inventories, combined with ongoing new construction activity, are signaling a recovery in the real estate markets.  The best news is where the volumes are the highest, Grand Rapids and neighboring Lakeshore areas.  The Holland area has its lowest inventories since last December- yes, traditionally the time in west Michigan where only the desperate or vacant are listed for sale- and a 62% increase in pending sales over 15 months ago when government incentives ended (Who needs government incentives?!!!).  This time I will let the numbers do the talking, just click on the names of the different areas above for charts.  Oh, and pay special attention to year-over-year and monthly numbers… Can the rest of Michigan be far behind?  You tell me.

The Truth...

This summer I have provided expert testimony twice. The first instance was in Wayne County Court for attorneys representing a home owner and the second was in Macomb County Court for attorneys representing a lender. In each case I had performed an appraisal estimating market value, as I do daily for clients. Most disputes involving value tend to resolve before reaching trial, so it is a rare event to be sworn in and provide the Truth, the whole Truth, and nothing but the Truth… and, in each case, I do. The Truth, as far as an appraisal is concerned, is an estimate of market value and here is where the fighting breaks-out.

In the first case, the defense also had an appraiser testify. He was a bank appraiser, and had performed two drive-by appraisals at two different points in time that were submitted as evidence to value. While the appraiser supported and defended his work well, ultimately his appraisals did not hold up as they were done on a drive-by basis with no interior inspection and his insistence that all his adjustments were appropriate as they fell within the acceptable industry standards. Whereas some of my adjustments were outside of industry standards, I had done an interior inspection and documented everything. I was granted greater credibility in the eyes of the court as the bank appraiser was conforming to lending industry adjustment standards and not deriving his information from the market.

In the second case, I was the only appraiser and I got grilled on the cross-examination. The whole experience reminded me of holiday dinner with the in-laws! Not only did I have to support and defend my approach to valuing a property retrospectively to 1994, I had to spar with an attorney looking to discredit me professionally, and my work, in his attempt to get the appraisal thrown out, leaving only his clients testimony as the estimate of value. Whereas his client acted as his own contractor and then sold the home to his daughter on land contract, his assertion was that market value could not be discerned as it was not a fair market transaction. Point is that “Market Value” is apparent in an open and competitive market, regardless of whatever concessions are made, as concessions are verified, analyzed and adjusted for during the appraisal process.

Here is the definition of Fair Market Value from my Appraiser’s Certification (which I brought forward in court): “…the definition of market value is the most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he or she considers his or hers own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing concessions granted by anyone associated with the sale.”

In both cases, I was regarded as a highly credible expert due to my professionalism and detailed understanding of the appraisal process beyond lending industry standards and guidelines. My adherence to market driven information, and ethics in not advocating a direction in value favorable to the client’s agenda, was critical… as was my understanding of the deeper concerns regarding Market Value. And, that is the Truth, the whole Truth, and nothing but the Truth!

8/25/2011

Trying to avert another dispute from going to trial, I met today with the attorney that referred the assignment and the heirs of the estate to help mediate an amicable division of multiple properties with differing values.   Further complicating the issue of value is that the highest valued property is a farm homestead that is still being farmed although the home and outbuildings are in disrepair and are near (or at) the end of their useful lives, and has been re-zoned from agricultural to residential at a time where residential new construction activity is limited to existing developments where sites have gone back to the banks.  Here, highest and best use became crucial in estimating market value.  The ongoing agricultural use is legally permissible, financially feasible and physically possible.  And, in a market with a low volume (recent history) of new construction starts, its highest and best use were deemed to be consistent with its ongoing use… agricultural.  The same held true for two of the four comparable sales used in the report, while the other two were zoned and used as agricultural.  Point being, by constantly refocusing on highest and best use throughout the appraisal process, I was able to provide a supportable and defensible estimate of value in a complex appraisal assignment.

Are you headed up or down the mountain?

It is no secret that new construction starts for single family homes are at historic lows for this millennium, although new construction starts show increases due to apartment construction starts and Habitat for Humanity homes permits. Despite declining values and an over-supply of homes for sale in most markets, a steady number of single family homes are being built and sold for a profit. How is the small builder today succeeding when larger scale builders have lower unit costs?

Some builders simply lower the quality of materials or labor. However, I met one builder this past week that is innovative, nimble and resilient- like most successful small businesses. Recognizing that materials are a fixed cost by scale and that quality labor is essential to a good reputation, this local builder pre- appraises (values) the home they can successfully build and sell for the area, and then purchases the land from bank foreclosure inventories at a discount with the bank providing the construction financing.

A steady, but thin, supply of new construction homes in the market competing with existing homes helps establish a cost-basis for home values… a win-win for builders, banks and the real estate markets if ever there was one!

A large part of the problems that real estate markets face today are derived from undue influence imposed by industry and government, not the quality control process.  Government involvement relaxing lending standards and guidelines to additionally excite the building and financial services industries while dismantling America’s manufacturing sector so as to be more competitive with emerging markets and mitigate trade deficits, for example.  When you put bad in you will get bad out.  Inflate the markets through regulation from the top down and you will get inflated results.  However, markets are organic and, like all organic systems, will adjust in an attempt to find an acceptable balance.

Three experiences brought this into focus for me recently.  First, this morning, I saw my chiropractor for an “adjustment”, where he corrected the adjustment my body had already made from my over-doing-it around the yard last weekend.  (My lawn looks better than most Country Clubs, and the bonfire was amazing… totally worth it!)  Secondly, after a couple long discussions with a non-profit last week, I pressed for feedback by way of results. The top decision maker responded that they had a process to follow and wouldn’t have results for a while.  I was disappointed as I believed they had gathered and analyzed all the information.  My bad.  Lastly, I offered on a bank owned home in Holland last month.  My wife loved the home, so I offered 10% under the highest priced comparable sale I found (not a foreclosure) to begin, and hopefully quickly end, any negotiations.  The bank stuck tight to their asking price, my wife found another home she loved more, and negotiations died.  I like the bank’s approach and wish them well, but doubt if it will bear much fruit unless the bank makes a minor adjustment.

Here’s the point. We all need outcomes. Results are validating, and they pay the bills.  However, it is the process and integrity of the materials being processed which generate quality results.  If you are not getting quality results, you must change either the process or the stuff going in…  Markets today need to change the stuff going in.  I know of one bank that is trying, and if they read this… consider dropping your pricing 10% below the market reflect obsolescence inherent in your distressed inventory that conveys a distressed and potentially challenged title.  Appraisers view impaired title as a form of obsolescence.

Stop me if you’ve heard this one…

Having rented a very nice, two bedroom/two bath, Loft apartment in Holland for the past year and enjoyed the maintenance free, in-town living, lifestyle… I’m ready to buy a house. We chose to rent as our future on the lakeshore area of SW Michigan was uncertain. Now, however, with my wife getting great results in her career and our daughters prospering in school (and socially), it is time for us to buy. Home prices have come down over the past two years and interest rates are still low, which helps a great deal in affordability. Still, I have two concerns…

First, everything is getting a lot more expensive while our incomes struggle to stay the same, or modestly improve. Food, gas, electricity, and clothing are all much more expensive than a year ago-  and these are things we all want each other to have. I don’t care how much gold you have, or the value of your portfolio… please invest in food, heat and clothing! Bottom line is that if inflation builds into the economy as the jobs market improves then interest rates should rise adversely impacting the affordability of homes, and values will drop more unless demand greatly improves.

Secondly, the trend is my friend-  and my friend tells me that home values have gone down over the past few years and will continue to decline. Buying a home now could mean losing money over the next few years if we needed to sell. While that trend seems to be holding for now, market conditions also appear to be improving in terms of a dwindling supply and steady demand. Of course, my friend also told me that the White Sox would win the American League Central this year, health care would become affordable for more people, and global warming would make Michigan more temperate than Kentucky… Maybe I need a wiser friend!

Yet, I am buying a house as I need a house. I could enjoy this in-town, Loft, lifestyle for another year or two, however my family needs a home for their emotional well-being. They need to have friends visit, colors they like on the walls, and more privacy. They need to play with the dog in the yard and listen to the crickets while they fall asleep, not cars and trucks. They need to build memories of a place we call home that reminds them of home, and apartment living does not fill that need-  no matter how nice it may be.

What does this deer have to do with home values?

If there is one lesson I’ve learned appraising and buying homes in Michigan this past year, it is that homes can be priced, and valued, in many different ways. Often price per square foot is the benchmark used, as cost to build new is considered a competitive influence for resale properties. After all, if you could build a reasonable “substitute” house for the same or less than you could buy the one you want today then economically it would make sense for you to build new. What happens then when there is a recession and “new construction starts” diminish? The relative basis between re-sales and new builds is disrupted, as new construction is no longer competing in the market. Price per square foot becomes less meaningful, and re-sale markets then rely on different benchmarks for value.
For example, I was appraising two neighboring properties recently. One was residential on an acreage site, and showed significant declines in value over the past two years based on comparable sales. It suffered most from the lack of new construction as both its price per square foot and land value had lost value due to a lack of new construction activity. The property next door was a two family, income property, on a typical residential site. It had maintained value fairly well during the past two years of widespread market declines. Why? Demand for rental properties had stayed strong, especially for two bedroom units in the subject’s market area. Therefore, rents had not declined and income remained stable, so did values.
When new construction was “booming”, the size of the site would be an indicator of value in areas experiencing redevelopment like lake front homes, or homes in other desirable lifestyle locations. Site size serves as a parameter for the size of a home. The bigger the site, the more square feet can be developed on the site based on local building standards, and therefore based on price per square foot the more valuable the whole package becomes. It is part of the Highest and Best Use equation known as that which is “economically maximally productive”. Of course, when everybody and their brother starts redeveloping and building new as a speculative way to make money, then we have… er… the situation we are in today with an oversupply of homes, many of which are bank owned.
Value based on bedrooms is not an uncommon measure for residential income properties, and when it serves to maintain a market balance in the absence of a cost basis, it can function in the non-income residential market as well. For example, I want to buy a home in the Grand Rapids/Holland market areas. In Holland, there are many homes for sale that were build new during the past 10-15 years, but not much new construction taking place today. For a recent construction four bedroom home there is significant market resistance at the $300,000 level. Sellers don’t want to sell for less, after all they paid much more than that when they built a few years ago, and buyers are few and selective. So, when a listing price falls below $300K, if the home has a good location and good appeal, it sells. Otherwise, it sits on the market. The same applies to three bedroom homes, except the price is less… about one bedroom less.
Anyway you choose to view residential real estate values, by the square foot or bedroom, by rental income or a multiple of land value, one simple fact remains: Ultimately, it is not the size of the home or site that contributes marketability and value, but demand for the lifestyle it represents. Live well my friends!

Making it in Holland...

“I was talking with X, who is a veteran Realtor in Holland/Birmingham/Bloomfield/Grand Rapids, and she says that sales are getting better. How are things for you?” This is perhaps my least favorite conversation starter, and it seems to happen nearly every weekend. So, not wanting to sound like a loser or a Debbie downer, I find some green shoot or silver lining in the market to talk about. This happened to me last night at the annual school fund raiser. Here is what I said.
The real estate market is getting better. We are heading toward a balanced market and the momentum should accelerate this summer, but we’re not out of the woods yet. What I should have said was, “Hey, it’s like George Carlin says, ‘Just cause you got the monkey off your back, that doesn’t mean the circus has left town!” Can I buy you a beer?” But, I had my appraiser hat on and suddenly found myself getting all technical, and tossing out numbers and market trend data, and my audience got that glassed over look in their eye which allowed me to make a quick exit. Sorry, Father Charlie… See you in church!
For your benefit, the improvement in the market is this: Listing inventories are down in many parts of Michigan, but especially in the Holland/Saugatuck area. Whereas last year there may have been two years supply of housing on the market for sale, today there is about a 10-11 month supply. Key to this equation is that while supply has continued to decline for the past seven months, demand has stayed constant in a narrow range. IF this trend continues “normal” supply-demand conditions will prevail by the end of the summer.
The bad news is that year-over-year sales numbers are down over 20% and will remain down substantially through June due to President Obama’s home buyer incentives last year that were so popular, and that we will thankfully never see again. For instance last February’s pending sales were nearly 50% greater than January’s, and stayed elevated in March and April of 2010 (as did closings). So be prepared for three months of TERRIBLE real estate news in the media… followed by the rain stopping and the sun coming out.
For market trend reports, please see the links on my web site. Or, call me.
By the way, I have noticed a similar pattern in Troy, Birmingham, Bloomfield, parts of Grand Rapids and other communities with stable governments and good schools.

Fundamentals

Markets are organic, and their landscapes change based on the various natural and unnatural forces at work. Just as nature is governed by physical laws and properties, markets are governed by economic principles and circumstances. If there is too much rain, or too many homes for sale, or too easily acquired financing, a flood occurs. Absorption is an issue for both the economy and the landscape. In many ways the economic principles that govern markets also govern nature.
In both cases, natural events tend to run their course and are an accepted part of the balance both try to attain. Occasional flooding is an accepted reality, as are occasional excesses in housing supply. Seasons of low crop production due to environmental factors are similar to years of low buyer demand in housing. Nature and markets are always seeking balance and harmony, although such balance is not sustainable and not all forces of change are organic.
As we enter into the sixth year of the housing crisis, the drought in the housing sector clearly appears to be of biblical proportions… that being of the “Seven” year variety with equity being a form of grain in reserve. For the past year and a half, I have been documenting signs of recovery in the Michigan housing sector. I focus on Recovery as there has been plenty of negative over the past five years, and I believe it is important to remain upbeat and hold tight to your values in trying times. Now, I ask, can homeowners in southeastern Michigan hold on for two more dry and skinny years? Here is why: There are also “Seven” economic principles that govern real estate values which support a recovery over time.

Anticipation, Change, Supply and Demand, Competition, Substitution, Balance and Contribution

ANTICIPATION states that value is based on market participant’s perception of future benefits of ownership. Arguably, too many “participants” mistakenly saw future benefit as economic gain and assumed risk that was not priced into the market. Both lenders and homeowners willingly over extended by investing in real estate that they didn’t need for monetary gain. I could never understand why two people would need a manor estate on two acres or multiple properties in different states. At its’ most basic level, real estate represents a lifestyle not an investment.
CHANGE is the result of the cause and effect relationship among the forces that influence real property value. There are four basic forces that promote change in the real estate markets: Economic, Governmental, Social and Environmental. Over the past five years governmental forces on the real estate markets from relaxed lending standards (designed to encourage everyone to own a home) to TARP related restrictions have not been good. Economic and Social factors have also been poor. Michigan has clearly been trending down. Fortunately, our environmental factors are great as are our lakes.
SUPPLY AND DEMAND are driven by desire, scarcity, purchasing power and utility. There is an excess supply of homes in Michigan today. Homeowners desire to unburden themselves in a declining market combined with a scarcity of buyers possessing reduced purchasing power due to job losses is at the root of today’s ongoing crisis. It would be a different world if there remained in Michigan manufacturing jobs that paid a healthy wage, then purchasing power and the desire to stay where a good job was would drive demand and absorb supply. Michigan has been renowned for its world class engineers, architects and masons… many have transferred out of Michigan.
COMPETITION is another principle that has been undermined by governmental influences and excessive real estate speculation. Basically, the free market system runs on competition. When I price my services, I compete with other appraisers in my market area. If I can demand a premium for my services, it is only because I offer a premium service. If I do not provide a value to my clients or my services do not produce the premium expected, then I should not expect to be in business very long. Oddly, competition is a social sort of “love thy neighbor as thyself” thing.

BALANCE is another economic principle lacking in today’s real estate market. This can be seen in the imbalance between supply and demand, and also cost and contribution. Value is created and sustained when contrasting, opposing, or interacting elements are in a state of equilibrium. When the distressed property (foreclosure) market became significant and sold at a discount to the market, values declined to the point where the cost to build exceeded the market value of homes, and after trimming costs and profits as low as they could builders stopped building. Recently, land values have significantly declined allowing for cheaper land to spur an increase in new construction activity, but nowhere near levels that would signal a recovery.
CONTRIBUTION is what an item contributes to value, what someone would pay for an existing item, as opposed to cost, what it would cost new to make regardless of what someone would pay. Today’s problem with the new construction markets is that newer construction homes (2-7 years old) with landscaping, fixtures, appliances, décor, etc. can be purchased for much less than they cost to build a few short years ago. The cost and quality of materials are basically the same, and technology has not changed significantly, so why pay a lot more to build new?
Finally, SUBSTITUTION is the principle most commonly at work in establishing value in real estate markets. It dictates that if you can get a reasonable “substitute” for a better price, then you will. House hunters view tens of homes that meet their needs, and settle on the one that maximizes their goal. The more information a buyer has to make a relative comparison in terms of value, the better an assessment in terms of price can be made… based on economic principles.
Does it make sense economically to buy a one year old house or build the same house on a similar site nearby today? The same model home on a less desirable site with main road frontage is for sale asking $10,000 less, is that enough of an incentive to compensate for the negative impact from traffic and noise on the main road? What lifestyle do they home buyers anticipate? Can the buyers afford the home of their dreams or should they be shopping for less of a home? If mortgage interest rates increased 1%, how much less expensive a home would a buyer qualify for? Regardless of the answers one fact remains, the value of the real estate is governed by economic principles.