Posted by Jonathan J. Miller -Tuesday, April 10, 2012, 2:09 PM 1 Comment
I got an email a few days ago from a group that was marketing a $35M property known as “Carbon Mesa Estate” in Malibu, California. They sent me an iPad with 3-minute action movie with high production values that shows off the features of the house.
The presentation was sent via an app (or a bookmarked home page button) on an iPad along with customized packaging and external speakers.
Because it is an app, I can’t share a link or a web site, but you’ll get a sense of it in my overview including who to contact if you happen to be in the market for a $35M Malibu property or know someone who is.
I am not a smoker. I’m highly allergic to smoke and tobacco. A number of relatives of mine have died from lung cancer, second hand smoke and other smoking related illnesses. I wish people wouldn’t smoke (and better able to quit) so I struggle to be neutral in my view of it’s impact on property values.
My quote on the issue for the Brick Underground piece was:
“I am not aware of any compelling studies that provide empirical evidence proving a smoking ban impacts values one way or another,” said Jonathan Miller, president and CEO of Miller Samuel, a real estate appraisal and consulting firm. “Personally, I would think such a ban would be slightly more of a help to values than a hindrance, since the number of smokers are on the decline — and the idea of selling the health benefits of a lack of secondhand smoke would be a plus.”
The policy momentum of our society has grown with the elimination of smoking on airplanes, public transportation, commercial buildings, public spaces and they all speak to the issue of invasiveness. Forcing non-smokers to breath something that has been shown to be unhealthy, even lethal, is no longer tolerated and anti-smoking public policy continues to expand.
So the issue as it relates to multi-family housing would seems to be the next shoe to drop with public policy. Perhaps that is already happening and I’m not aware of it.
Even though a smoker may own their residence and have the right to enjoy it as they see fit, the impact of their behavior moving outside their domicile (i.e. smoke permeating walls and air exchanges) would seem to be invasive and not their right.
With possibly one exception
Grandfathering. As an apartment homeowner, they may have had the right to smoke when the property was purchased and I don’t see how their bundle of rights as a property owner can be altered. They followed the rules and non-smokers who purchased during that era would be aware that there was no ban on smoking.
A new building that bans smoking from day one – that’s not a problem.
But back to the valuation issue. I think I see more potential downside to property values in the long run within buildings that allow smoking to new buyers than to a value upside in buildings that never allowed smoking from day one.
Admittedly I’m merely voicing a subjective opinion. I’m relying on the logic that societal norms will continue to move away from public smoking tolerance.
Posted by Jonathan J. Miller -Monday, March 5, 2012, 1:58 PM Comments Off
My friend Noah Rosenblatt over at Urban Digs has been pestering me to share some thoughts on what a “comparable sale” actually is. He and I often complain about how loosely the term is thrown around in the real estate community. This is being presented in the context of a single residential unit and I deliberately avoided using dry dictionary and textbook definitions.
The use of comparable sales are the basic ingredient for real estate appraisers and agents to vet out market value – so the similarity of it to the subject property (the property being valued) is paramount.
As an appraiser, I see the term “comparable sale” often abused. Some of it can be chalked up to inexperience and some of it to fraud. An illustrated deterioration of the slippery slope goes something like this:
Comparable Sale -> Sale -> Data -> Information -> Misinformation -> Fraud
A practical definition
A “comparable sale” is a sale that would be considered an alternative choice to a buyer that might purchase the subject property.
The sale should have a similar set of amenities (ie, size, condition, location, views, configuration, etc.) to be considered as an alternative choice for the buyer. However it gets tricky when the subject property is unique and there are few “comps” to use. Unfortunately it is often the case where there are no “comps” but that will be for another post.
And don’t forget to factor in concessions that might have been part of the “comp” sale. In most cases, the concession should be deducted right from the sales price since the “net” is what the buyer actually thought it was worth. Again there is a lot more too this but I think you get the idea.
One important thing to keep in mind: One “comp” does not make a market. In other words, a market is defined by a general pattern, not one sale. The sale could be an outlier and not reasonable if it is out of sync with everything else.
Not always a “comp”
From practical experience, I have observed that a sale is not always a “comp” just because:
it was given to you by a real estate professional (i.e. appraiser/agent)
it was used in a report
it was close in proximity and recently occurred but would attract a different buyer
the “comp” provider was familiar with it (i.e. appraised it, sold it) but otherwise not similar
In real estate appraising, comparable sales are presented in the report and adjusted for their differences with the subject property (the one you are appraising). The more adjustments that are needed to be made, the less “comparable” the sale is. A reader who may or may not be familiar with the market the property is located within can should be able to use them to make a more informed personal/business decision on the asset (house) being valued.
In real estate brokerage, agents use “comps” to establish the market value of the potential listing and use the value to develop a pricing strategy (ie listings are not “comps” without considering some sort of listing discount).
Comparable sales are nearly always a closed transaction but don’t get hung up on that. They can be pending sales and listings as well.
Appraisers, especially AMC appraisers often without local market knowledge claim they are mandated to only consider “closed” sales as “comps”. Wrong. Total cop out. Lazy. Incompetent.
I like to use the word reasonable when looking at a sale being considered as a “comp” to the property being valued. While housing sales are not like snowflakes (ie no two are the same), remember to ask yourself whether a theoretical buyer for the property being valued would consider the “comp” as an alternative to purchase.
Low appraisal ±5% – It’s good to see my profession not responsible for all the world’s problems and the least of the “blown deal” phenomenon.
Tight credit ±10% – Surprised it’s not higher although this accounts for people who applied for a mortgage. One of the big issues today is potential buyers staying on sidelines because they don’t think they would qualify. In other words tight credit is a much large issue than illustrated.
“Other” ±20% – The largest category by far, the dreaded “other” is the bane of our economic existence. My mother always told me to look both ways when crossing the street or “Other” might clip you in a large sedan. I’ve got to think that the lion’s share of “Other” is made up of buyer cold feet and some sort of appraisal/credit combo.
Posted by Jonathan J. Miller -Monday, February 13, 2012, 6:00 AM 16 Comments
There was a 21.2% decline in listing inventory from December 2010 to December 2011.
Relying on typical housing market scenarios and reasonable logic, a decline in listing inventory nearly always meant a tightening market was developing – fewer houses coming on line matched against steady demand meant housing prices were more likely to stabilize or rise.
Declining inventory is the variable in the housing equation that usually makes conditions improve. During the mid-decade housing boom, falling inventory was caused by the insatiable demand by buyers – product could not get out to the market fastest enough. Listing inventory was simply “worked off” by (artificially) inflated demand. Listing discounts approached zero, days on market fell to record lows and prices rose rapidly.
Old scenario: Declining Listing Inventory = declining housing prices ease their decline, prices stabilize or prices rise.
However over the last year, listing inventory fell sharply in many markets yet sales were generally anemic or showing nominal increases. In the NAR numbers, non-seasonally adjusted sales were up 1.4% year over year (using NSA since inventory is also NSA) yet inventory was down 21.2%. Inventory was clearly not declining because sales were overpowering the amount of listing inventory that was available.
New scenario: Declining Listing Inventory = fall in seller confidence and the sharp decline in distressed inventory entering the market.
Total housing inventory at the end of December dropped 9.2 percent to 2.38 million existing homes available for sale, which represents a 6.2-month supply2 at the current sales pace, down from a 7.2-month supply in November.
“The inventory supply suggests many markets will see prices stabilize or grow moderately in the near future,” Yun said. – National Association of Realtors
We are seeing unusual declines in many markets I keep tabs on such as:
Admittedly I am cherry picking some of the cities that are posting huge declines in inventory. However the problem I find in all of these markets, is that sales are only increasing a few percentage points. Not nearly enough to explain the rapid decline.
The drops are being touted as a good sign that housing is getting back on its feet. I’m not so sure.
I think the sharp drop in many US housing markets (and this has been happening for much of 2011) has to do with three key reasons:
A large swath of foreclosure volume was artificially delayed.
Seller confidence has waned after the pounding it took last fall.
Low interest rates extended by the Fed for the next two years have removed any sense of urgency.
Declining foreclosure volume is one of the key reason inventory levels are dropping. The 1/3 decline in foreclosure volume in 2011 has resulted in a sharp drop in foreclosure inventory resulting in a sharp drop in total inventory. Distressed sales have been running at about 30% of total sales nationally for a few years but fell to about 20% in 2011. With a 2 million more homes expected to go into foreclosure over the next 2 years, a year long internal review of procedure after the 2010 “robo-signing” scandal and the 50 State AG settlement with the largest services/banks, distressed inventory is expected to rise sharply over the next several years.
Weak seller confidence is causing property not to be released into the market unless the need to sell is not optional. The 2011 home seller and buyer was bashed with the debt ceiling debate, the S&P downgrade of US debt, 400 point daily swings in the financial markets, the European debt crisis, the AG/Service settlement drama and the political stalemate on housing policy in Washington. What do people do when faced with the unknown? They sit and wait. Buyers had a lot more incentive to act with falling mortgage rates to record levels but mortgage underwriting grew tighter over the year as well.
The extension of the low interest rate policy by the Fed through the end of 2014 has obliterated any sense of urgency by sellers. I am getting a lot of feedback from real estate professionals about this as well as seeing it within my own appraisal practice. There is a lot going on the world right now and the action by the Fed suggested that they weren’t particularly encouraged by the economy. To many this may seem as an incentive for sellers to get going and sell. But many of those sellers have to buy.
The drop in inventory as a phenomenon may or may not pass quickly but one thing is clear – weird changes in market behavior happen for a reason – I don’t see declining inventory as a particular sign of strength in the housing market.
Posted by Jonathan J. Miller -Tuesday, November 29, 2011, 2:00 PM 3 Comments
I was asked this interesting question the other day [specifics changed]:
What is the typical percentage discount on a property’s price in order to achieve a quick sale, i.e. liquidation or disposition value versus market value?
There is no rule of thumb for a “quick sale” value since it is always changing and depends on the property type, location, supply, demand etc. but here’s the logic:
The quick sale value is a function of the marketing time that is required by the owner/client which is often faster than the current market can achieve.
Translation: sell it faster than competing properties in the same market i.e. compress it’s marketing time.
For example: The average days on market might be 6 months in the subject neighborhood – the number of days from the original listing date to the contract date – but the client wants to know what the value would be if they had to sell it in 30 days. This comes up in a foreclosure transaction (and can sometimes explain the “discount” mistakenly identified with such sales), a corporate relocation sale (when a company is buying the home when relocating an employee) or even a seller is under duress who has to sell quickly.
If someone has to sell a property much faster than typical market conditions, then the price must stand out among the competition to allow the property top sell first. This doesn’t mean that a lot more marketing is required – you’ve usually got plenty of competition – it means the price needs to be lower.
The larger the difference between the two periods of time to market a property (quick sale and typical), the larger the discount needed to move the property faster.
Unfortunately if the market is declining, the seller has to price the home ahead of the declining conditions and not “chase the market”. A simplistic example might be something like this:
If the conditions show a 10% annual decline and the average house is usually on the market for 6 months, that means the average house would be expected to sell for 5% less 6 months from now (this is an example – I’m ignoring seasons). Since that is what the average house does, one way to sell the home faster is to outpace the expected decline. This is a significant problem in areas with a lot of distressed property since everyone does this and forces the market to fall faster.
In a rising market such as during the frenzied market in 2004, there was no difference between “normal marketing time” and a “quick sale” since all properties sold almost immediately.
The most probable price which 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.
Then of course there are many other uses that are thrown into the same caldron of confusion:
Appraised value – the value on an appraisal report
Investor value – value of the property is to a specific individual or entity – not necessarily market value
Fair market value – an accounting term, “old school” market value name and commonly used within the legal system
In layman’s terms let’s talk about how “market value” is being misused.
When a home is properly exposed to the market (listed so buyers can see it in a reasonable period of time), it sells in the marketplace for its value as of that moment.
Market value isn’t precise
Hence my problem with a Zillow “Zestimate” where the presentation is an exact number for the value of a home i.e. $257,532. Perhaps that’s why this tool has long been buried in their web site after being so prominent on their home page after launch. I have never heard of a housing market today that has that kind of precision. If I appraise something for $500,000 and it sells for $505,000 or $495,000, I was spot on the money so to speak.
I see market value of a home as some sort of “range of gray” that I am comfortable with given what I know about the housing market that the property sits within and how its amenities are considered in that market.
One sale does not make a market
As crazy as it sounds, we appraised a Manhattan transaction a long time ago where the buyer was in a 5 way bidding war of a multi-million dollar listing and offered $2M above list “to avoid the stress of a bidding war and get the property they wanted.” They knew they over paid but it was worth it to them. Was this sale price a new benchmark for market value? Of course not yet it was what someone was willing to pay. That’s investor value to the buyer, but not an establishment of market value. It was worth it to them, not the market (wouldn’t we all love to be the seller in that situation?).
During the dot com boom more than a decade ago, there was a townhouse in downtown Manhattan that was purchased by a newly minted dotcom type for $12M, about 2x the market level at that time as I recall (and that was generous). That sale actually seemed to slow down the high end market for a few years within the neighborhood as sellers continued to point to that sale as establishing “market value.” As a result, many overpriced listings sat for extended periods of time until reality sank in. The sale’s impact on the market eventually dissolved and the market returned to sanity.
Posted by Jonathan J. Miller -Tuesday, August 16, 2011, 10:52 AM Comments Off
[click for info graphic]
Trulia released its Rent v. Buy Index today that reflects a more robust rental market, to the point where 74% of the 50 largest markets show it is cheaper to own.
I report and work in the market (NYC) that ranks at the top of the Renting is Cheaper than Buying list and I will be covering the market (Las Vegas in 3Q) that ranks at the top of the Buying is Cheaper than Renting list.
“While recent stock market volatility on top of the slow economic recovery makes homebuyers nervous, it has not destroyed the American dream of homeownership. However, prospective homebuyers, who are ready and qualified to buy, face an uphill battle despite falling home prices and record-low mortgage rates,” said Ken Shuman, Head of Communications at Trulia. “Today, many banks are actually less enthusiastic about approving residential mortgage applications, which has dragged out the home buying process. Until a middle ground on lending practices can be met, many highly-qualified buyers may be forced to be renters by choice for now.”
My key takeaway here is that a strong rental market does not mean a local economy is recovering. Generally the rental market leads the sales market in a recovery because rents are more responsive to changes in unemployment than sales are. The rental market is strong in many markets primarily because credit is so tight.
The American Dream or whatever you want to call it, is a separate matter. Homeownership is currently on the decline because it was artificially high during the credit boom and mortgage underwriting remains unnaturally tight in the aftermath. In my view, falling homeownership has 0% to do with the American Dream thing and 100% to do with the Fed keeping rates artificially low.
Incidentally, Trulia now has no peer in the real estate space when it comes to interactive visualizations since they purchased Movity. I moderated a panel at the Inman Data Summit in SF with Eric Wu, one of the Movity founders and now Head of Geo Products with Trulia. He creates some crazy amazing elegant stuff. [disclaimer: I'm on Trulia's industry advisory board]
Had a fun interview with Tom and Sara this morning on the always MUST watch/listen Bloomberg Surveillance. We talked housing, rentals, vacancy and inventory. An added bonus was the addition of Adam Davidson – co-founder and co-host of Planet Money... Read More