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BugsParticipant
As an appraiser, I have some familiarity with Zillow and other artificial valuation models. They don’t produce appraisals as we define an appraisal, but they do provide information and as we all know information can be a powerful tool when used well.
Inasmuch as this type of information has not been as readily available in an easy format at the consumer level, I think that as time goes on and more people learn how to use the information well it could have a significant impact on how these trends unfold. For instance, if after suffering a big decline in values it becomes apparent to people that they could have avoided their losses in the first place by following the blogs and keeping up on the information, it could serve to stabilize our cycles somewhat by alerting people to where the prices are in relation to the historic trends. I mean, if people realize that once prices decline past the trendline it becomes safer for them to buy those trendlines will serve as triggers. If enough people came to that conclusion it could prevent the market from sliding too far into the red. Likewise, if people realize the prices are getting too far ahead of the trend it might cause *some* people to hold off, depending on what their motivations for purchase are.
If you were to ask appraisers about this current trend you’d find that most of them believed it got crazy 3 or 4 years ago – hardly any of them were buying then because they recognized the high point for what it was. That’s the result of having the data and the tools to analyze that data; and it’s an effect that could possibly trickle down to the masses as the information becomes more available and the tools become easier to operate.
That is, unless I’m being too optimistic about the intelligence of the masses.
BugsParticipantI don’t know of any historical records. All I can do is tell you that SFR rents never did go down – they just stayed where they were and didn’t go up. Matter of fact, rents didn’t increase at all until the sale prices moved out of the low side of the cycle and passed the historical trendline itself. Since 1990 the rent amounts have increased an average of about 50%; which is not unreasonable when compared to housing prices and when considering the effects of inflation on the dollar.
BugsParticipantI think there’s a difference between a homeowner thinking about renting and cashing out to actually do it. But if a lot of owners did move out to rent it would probably lead to an increase in SFR rents. Let’s face it, when compared to paying $1,400/month to rent a 2bd apartment in a nice project, paying less then $2,000/month for a detached home in a comparable neighborhood is indicative of an SFR rental market that’s somewhat undervalued when looking at the relative utility of these different property types. Those SFR rents probably SHOULD come up a couple hundred bucks. At least.
BugsParticipantIt’s funny you should mention Hollowbrook Ct. I just did a review on an appraisal on one of those homes and it’s not looking good. As of last week, Pulte had sold 85 out of 105 units and they are now getting into the price-inclusive strategy where the base price includes many of the typical “extras” that they used to charge $30k for in their prior phases. So while the base price hasn’t changed the sale prices are effectively going down when comparing homes with similar finishes.
All of SEH is looking a little weak right now, pretty similar to the lower and middle ends over at Bressi Ranch.
I think SEH should be judged for what it is, not for what it isn’t. It is a planned community with it’s own schools and it’s own supermarket anchored retail center (when it’s finished). There will be more direct access both to Rancho Santa Fe Road and CSU San Marcos by the time they get done. It would be nice if they’d stop marketing it as “almost Carlsbad” because there’s nothing wrong with being San Marcos. Considering the $200k differential between SEH and that Carlsbad neighborhood east of RSF Road/La Costa Blvd, I think SEH is a no-brainer. After the regional prices decline, of course.
BugsParticipantThe good thing about a market correction is that it invariably washes out the weakest links. You don’t judge how good someone is at what they do by the amount of money they made during the good times, you judge them for how well they do when times are tough. I daresay that anyone who has been in any of the real estate related occupations is untested until they make it all the way through an entire cycle. Thay can say what they want, but the truth is that they really don’t know and they really can’t prove.
BugsParticipantThink about this. The only reason that “now is a great time to buy” for a buyer is if they think the long term pricing trend is stable or going up. WHEN it becomes apparent that the trend is going down, that motivation is no longer applicable. The more the trend declines the less motivation there is to buy. At whatever point the majority of buyers come to perceive that the price trends will decline a long way the volume of sales will drop off so much that there won’t be hardly any sales at any price.
Already we can see people who might want to get in but who are recognizing that now is not the right time. Think about what it means when a friend or casual acquaintance can dissuade a potential buyer to hold off on making this kind of investment, even in the midst of the “please remain calm” media campaign being run by the biggest names in the real estate business. Think about how many more people will sit on the sidelines, not buying at ANY price, until the cost of buying is somewhere close to renting. Because that’s the benchmark the economists are going to end up pushing in answer to the question of “when should I buy?”
When the pricing trend reaches that critical mass, it won’t matter how badly a seller wants to sell because their buyers won’t pull the trigger until the prices recede. Because a seller basically can’t sell for much less than the current balance on their mortgages, those sellers who are maxed will end up being trapped in their homes until they either default or the market comes back around in the next cycle. Or perhaps I should say, IF it comes back to this point in the next cycle.
I’ve been in the appraisal business for 20+ years now and this is the first time I’ve ever even heard of people seriously considering selling in favor of renting. Yesterday, I spoke with a friend of mine who retired after 45 years in the appraisal business and he said he’d never heard of it either. The current attitude going around about questioning the true value of “ownership at any price” is as unprecedented as the price spike that has contributed to it. I don’t think it is being too unrealistic or too negative to extrapolate an increase in the number of people who will eventually come to hold that attitude as it gets more media play. Social acceptability of renting could possibly end up having a huge impact on the market psychology, which in turn could have an impact on how well the “buy now or get priced out” marketing ploy works in the future.
BugsParticipantThere’s plenty of blame to go around. The realty agents, the mortgage brokers, the appraisers, the lending institutions and the government who is charged with regulating them have all succumbed to greed. Lest we forget, many of these buyers are not so pure, either.
“You can’t cheat an honest man”.
I have personally seen a lot of deals where almost every party involved in the transaction is being dishonest, and that includes the borrower. You can’t get an $800k CLTV mortgage on your $70k salary without doing something dishonest.
Ironically, I think the group that shares the least “blame” for our current trends are the realty agents. Their job is to be an advocate, which by definition means playing up the positive and playing down the negative. Their compensation is directly tied to the amount of the sale price, so it would not be inaccurate to say that the way the system is set up their loyalty is ultimately to the deal rather than to any of the principals. The only reasons they have for being at all concerned for their clients’ interests are because of legal liability and in order to garner more deals through repeat and referral business.
When times are good, neither of those two controls are of significance. There are lots of easy deals going around, and a rising market will cover all manner of sins that would make them vulnerable to legal liability. So except for any outright lies they may have told whilst advocating for their deals, they haven’t really done anything but facilitate the sellers’ greed.
The lies that it takes to do one of these outrageous deals generally get told by other people, starting with the buyer and including the mortgage originator and the appraiser and the loan underwriter. Inasmuch as the sole obligation of the appraiser and the underwriter is to observe and report the truth, and because they are the only ones whose compensation is not tied to the amount of the deal, it is their lies that do the most damage.
April 19, 2006 at 12:52 PM in reply to: The effect of stopping raising short term interest rate by the Fed #24353BugsParticipantI dunno, raising the interest rates didn’t seem to have much effect on mortgage rates. I’m not sure I’d translate a “not raising the Fed rate” as having a corresponding effect on mortgage rates. It would be of influence but I think the withdrawal of the foregin banks from the dollar would be of greater effect.
BugsParticipantSome of these real estate boosters make claims that would be totally illegal if made for other types of investments. A securities trader could never get away with making some of the wild claims that these guys have been getting away with.
BugsParticipant“Tenants in common” is just another form of taking ownership, kinda like an LLC or a corporation or “sole and separate ownership”. With any form of joint ownership each of the members commit to paying their share of the downpayment and the mortgage in exchange for a return on their investment, either in the form of positive cash flow or in the form of the profits upon resale. If someone is not carrying their load the other members have to make up the difference. The structure of the partnership is a critical component that can lead to either success or failure.
You’d also have to do a little research and decide on the health of the tenants upon whose strength the properties are being marketed. Blockbuster Video was considered to be a real good commercial tenant to lease to until they went into bankruptcy. I can name a dozen other companies that on the face of it would appear to be ‘safe’ investments but which are vulnerable to the vagaries of the economy. The E-coli scare almost did in Jack in the Box, and Burger King has been closing down their less profitable locations. More than one investor has been burned by incorrectly assuming a lease would be extended just because it had already been in place for 20 years.
Even the governments can be a gamble, depending on which agencies they are and which political party is in power. Some minor social services agency might not be a good bet when the Conservatives are in power, and a defense think tank may not be a good bet when the Liberals are in power. Same goes for state agencies, only more so. Funding can get cut in a flash.
Right now, many of the commercial properties are almost as overvalued as are the residential properties. Commercial investors tend to not get too emotionally attached so the various changes in value can occur even more quickly. If you’re at all nervous about residential properties, commercial properties would not be a reasonable alternative.
April 17, 2006 at 10:57 AM in reply to: UT Sunday Home Section article “Is there a buble? Do the math” #24286BugsParticipantThe idea of analyzing the value from an income standpoint is nowhere near new. I do it all the time when I’m appraising income properties such as apartments or office buildings or multi-tenant retail properties. Breaking the “income” down by net proceeds of the rent and net proceeds of the eventual sale and adjusting for the effects of inflation to render a current “value” indicator are also common valuation tools being used by appraisers every day. I don’t really see why the economics community is deeming this “new” other than the fact that Income is seldom considered to be the driving factor for properties that are primarily purchased by owner-users rather than income-oriented investors.
As has been alluded to above, when looking at an investment with a long term cash flow analysis, the assumptions used are critical. The article made light of “quibbling” about the assumptions, but when the holding period stretches on for more than a couple years it takes only very minor variances on those assumptions to completely dork the results. The reason for this is because of the effects of compounding. That is, an assumption of 6% average annual increase over 5 years will result in a 33% increase in the value. If you knock that assumption down to even 5% it reduces the increase to only 27%. So the difference between a 6% average increase over the next 5 or 10 years is going to be DRAMATICALLY different than an average increase of only 2%.
The other problem with their methodology is that they’re applying that average rate of increase based on the current price, not on the historical average upon which that increase is based. The historical average over the last 60 years is about 2% – 2.5% depending on which index is being used. But that 2.5% is based on the trendline itself, not any specific point that contributes to the trendline. The trick in doing Net Present Value (NPV) analysis is to reasonably forecast what’s going to actually happen during the next few years. If we’re on the down side of the trend we can reasonably project a higher-than-average rate of increase for the period starting low and going high. Conversely, if we’re at a high(er) point in the trend it would make sense to project a loss – not a gain – during the period from the high to the low.
So, if you think we’re in the New Paradigm where the old trendline no longer applies and the values will stabilize more or less where they are now, an assumption of a 2% average annual increase over the next 10 years would be reasonable. If you think we’re at the bottom end of a big increase then the 6% assumption would be reasonable. Personally, I don’t think either scenario is reasonable at this time and I’d be using a rate of decrease, not increase, to apply over a holding period starting right now.
In summary, I think the gathering of comparable data and their initial methodology are both reasonable, but parts of their application are poorly developed from a valuation standpoint. This is probably as a result of neither of these people actually being in the business of real property valuation – they’d get hammered if judged by our standards for not supporting those assumptions. They’re academics working in the macro, not appraisers working in the micro.
If there was any interest in doing so, we could build one of these NPV worksheets and see how the results turn out. We could do that by picking a specific property with a known rent, finding comparable sales data to determine a market value for it, and then running the income/expense, cost of sales and NPV calculations over a limited holding term to see how such an investment would stack up. We could even do a few what-ifs, using different assumptions to demonstrate the effects of those assumptions and to provide alternative ways of considering them.
Anyone interested in seeing the Pepsi Challenge?
BugsParticipantThe type of investor that can actually pull off a land entitlement flip is not the type of buyer whose driving this or any other market. Definitely the exception to the rule.
It remains to be seen if this investment group is that type of investor. I’d like to point out that “in escrow” is still in escrow until that escrow closes. More than one land development deal has fallen through at literally the last moment. What’s happening around the time this deal is set to close may very well kill it. I’ll bet at least some of the partners are sweating it right now.
There’s a reason land development can be so profitable and that’s because of the extra risks involved with projects that require a lot of time. The people who can make it happen really deserve to make that kind of profit for all that work and risk. Even the pros get burned sometimes, and it doesn’t take many losses to wipe out the gains.
BugsParticipantIt might be because I’m looking for the media accounts of this, but it seems like the media has really grabbed hold of the theme and amplified it just in the last couple weeks. Not to get too “hippy” about this, but I have come to recognize that the perception contributes to the reality just as much as the reality contributes to the perception.
I love to see a statistical model forecasting such a trend. Still, I have a feeling that if such a model could be graphically displayed it would look so drastic that people would dismiss it out of hand. I mean, who takes seriously the thought of a 40ft Tsunami wiping out a coastal region located 1000 miles away until it happens?
April 15, 2006 at 11:42 AM in reply to: Fed stablishes Newbank to mitigate risks to the financial system #24250BugsParticipantSufferin’ Succotash, I’m having another deja vu moment from the ’80s. I’m seeing the reincarnation of the Resolution Trust Corporation, aka “RTC”. I just KNEW we’d end coming full circle.
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