Appraising Real Estate In a Declining Market

Transcription

1 Appraising Real Estate In a Declining Market

2 Massachusetts Association of Assessing Officers Randolph, MA January 19, 2011

3 Some of the Basics

4 Change Is pervasive in the market and ongoing Different aspects of the market change at different rates and at different times ie commercial real estate over the past decade has changed more slowly than residential real estate To assume that a rising market is like a rising tide that lifts all boats equally, is a fallacy Even components of total value (land, buildings and outbuildings) change at different rates Luckily assessors have the perspective of estimating the market as it existed in the past

5 Underlying This or Any Other Time Market Value Period Informed buyer and seller Both buyer and seller working prudently and in their own best interest Proper exposure to the market Payment in terms of cash or its equivalent

6 How the Concept of Market Value changes with the market Or as they used to say in the cigarette business: Its not how long you make it but how you make it long

7 How We Look at Market Value Changes with the Market Proper exposure to the market During a strong market 3 months During a balanced market 3 to 6 months During a declining market 6 months to 1 or 2 years

8 Market Value Considerations of cash or its equivalent In a declining market, sellers often try to incent the buyer to buy their homes A free Hummer with the purchase of a home Free upgrades Granite counter tops Hardwood floors Upgraded appliances Amenities» Porches» Pools» Etc.

9 How do Incentives Play into Market Value It s not necessarily what the buyer pays as much as it is what the seller receives It isn t determined by the costs to the seller As much at it is reflected in the market Resources Paired sales analysis Brokers interviews and opinions The opinions of the buyer and/or seller

10 Contribution/Increasing and Decreasing Returns The addition of an item or items increases the value of a property Increasing additions will increase the value of a property up to a point. Past that point, further additions will increase value but to a lesser degree. This changes with the market In a declining market, enhancements may not increase the value of a property at all. They may just help the property to be sold.

11 Real Estate Market Efficient Market vs. Inefficient Market Definition of an efficient market Centralized Not Regulated Supply can be increased quickly to meet demand Easily affordable

12 The Real Estate Market Not Centralized The real estate is not centralized and is individual (unique) to every city and town within the Commonwealth Highly Regulated The real estate market is extremely regulated. As a result, projects take an incredibly long time to get off the ground. Supply increases and decreases slowly See above. Supply in markets builds slowly and an oversupply in markets can take years to be absorbed. It is not affordable main point of why we are all here today Real Estate usually requires financing It is questionable, at today s prices, that real estate is affordable to first time buyers

13 Four Great Forces Social Early 1980s migration from the Northeast to the Sunbelt Economic Change in the prime lending rate increasing affordability of homes Environmental Global warming and the green movement Not restricted only to climate The recession of the early 1990s and the present recession were caused by the environment (the economic environment) Environmental (Externality) is a form of depreciation and really means anything external to the property Governmental Changes in laws - the increasing or diminishing the appeal of certain types of properties (Tax Reform Law of 1986)

14 And Along the Same Line: The Elements That Create and Sustain Value Utility (Functionality) Real estate must have utility to have value Can you think of any utility issues in real estate in your community today that might adversely effect value» Hints Asbestos heating systems Living rooms (the advent of the family room) Number of bathrooms McMansions (super adequacy) An aside in seller-skewed markets (appreciating markets) issues concerning utility are minimized, and in buyers markets (declining markets) they are maximized» Items that you may have discounted as being unimportant may develop new meanings in value

15 Creating and Sustaining Value Continued Scarcity Goes hand in hand with the principle of supply and demand When supplies are low, values tend to be up When supplies are high, values tend to drop Effective Purchasing Power In this market values have been supported and sustained by low interest and low cost loans, which allowed values to increase above levels of what, today, appears to be affordable Desire Desirability in a strong market is inherent, in weak markets may need to be created in the form of incentives

16 Four Agents of Production Land Land is the speculative part of the market During strong periods of decline it may be that the only thing declining is the value of the land Labor Declining markets can also be earmarked by an abundant and stagnant work force The Great Depression Capital Declining capital markets (the availability of cash) can cause a market to decline or the infusion of capital can minimize the impact of a recession. The mortgage crises of the early 1980s The tax bailout of Coordination When markets go into decline, profit diminishes and fewer projects get started (the beginning of declining supply and a new upward market cycle)

17 05 1st 05 2nd 05 3rd 05 4th 06 1st 06 2nd 06 3rd 06 4th 07 1st 07 2nd 07 3rd 07 4th 08 1st 08 2nd 08 3rd 08 4th 09 1st 09 2nd 09 3rd 09 4th 10 1st 10 2nd 10 3rd 10 4th Numberf Supply and Demand Listings Vs. Sales Belmont 2005 to Period Listings Sales Source: MLS P.I.N.

18 Reading the Market Time Line Tax Relief Act of 2007 Allowed for short sales Tax Relief Act of 2008 (Emergency Economic Stabilization Act of 2008) Enacted October Billion bailout. Tax Relief Act of 2009 (American Recovery and Reinvestment Act of 2009) Enacted February 2009 Expansion of unemployment benefits and other social welfare provisions. Created an $8,000 tax credit on homes purchased between 1/1/2009 and 12/1/2009.

19 Median Price Supply and Demand - Continued Median List Price vs. Median Sales, Belmont $900,000 $850,000 $800,000 $750,000 $700,000 $650,000 $600,000 $550,000 $500,000 $450, st 05 3rd 06 1st 06 3rd 07 1st 07 3rd 08 1st 08 3rd Quarter 09 1st 09 3rd 10 1st 10 3rd Listing Sales Source: MLS P.I.N.

20 Average Days on the Market Belmont 250 Days on the market Days on the market st 06 3rd 07 1st 07 3rd 08 1st 08 3rd 09 1st 09 3rd 10 1st 10 3rd Source: MLS Property Information Network

21 Average Days on the Market Belmont Vs. Lynn Belmont Lynn Source: MLS Property Information Network

22 Supply and Demand The first step in trying to predict and understand the market Split into two indices Supply side Listings Asking prices Rentals Foreclosures Vacancies Days on the Market New Construction» Single Families» Condos» Rentals

23 Supply and Demand Demand Side Number of Sales Sale prices Rental Rates Affordability Price increases Income Levels Interest Rates

24 Characteristics of Demand vs. Supply Skewed Market Demand-Skewed Market Seller is in control Marketing times are shorter Properties tend to sell for near or above asking prices Many sales are the product of bidding wars Deficiencies in properties do not result in discounted values Updates are usually paid for at a premium

25 Supply-Skewed Market Buyer is in control Marketing times are longer Can be as long as one to two years Prices are discounted more strongly Larger disparity between listing price and sales price Incentives are common Listings are predominant Brokers become more discriminating about accepting listings (will not accept over-priced homes)

26 Signs of a Transitioning Market From a demand intensive market Values stabilize Inventories start increasing Marketing times begin to increase FISBOS For Sale By Owners become more common Reductions in listing prices become more common Transitions from broker listings to FISBOS become more common Transitions from demand to supply-oriented markets are much more sudden and apparent

27 Signs of a Transitioning Market From Supply-Skewed Markets to Demand- Skewed Markets Much more subtle and more gradual Supplies dry up (usually decline slowly over time) Prices (after supplies are minimized) begin increasing Marketing times shorten (probably first to happen)

28 Sources of Market Constriction - Early 1980s A Historic Perspective Interest rates increased to all time highs The Market suspended The costs involved with holding real estate squeezed potential buyers out of the market No Demand Out migration to the sun belt (more affordable areas)

29 Sources of Market Constrictions - A Historic Perspective October 22, 1986 Tax Reform Act of 1986 Removed tax write offs on second homes (more than one) October 19, 1987 Black Monday Stock market crash August 9, 1989 Enactment of the Financial Institutions Recovery and Reform Act of 1989 (FIRREA)

30 Results of each event Tax Reform Act of 1986 Removed investors from the condominium market Black Monday Dried up available investment capital in real estate FIRREA Regulated banks and how they would lend money Was a catalyst in the Savings and Loan Crisis of the early 1990s What followed

31 BREAK

32 Results of each event Tax Reform Act of 1986 Removed investors from the condominium market Black Monday Dried up available investment capital in real estate FIRREA Regulated banks and how they would lend money Was a catalyst in the Savings and Loan Crisis of the early 1990s What followed

33 Recession

34 Recession Time Line

35 Dealing with a Declining Market Noticing the signs Hearing it in the news Collecting and reading the data Understanding what it means locally (in your community) Becoming a local authority Reacting to the market correctly Becoming an authoritative source of information and knowledge (getting the word out)

36 Noticing the Signs Newspapers Banker and Tradesman Boston Globe Boston Herald Local and National News T.V. Broadcast News Radio - WBZ

37 Banker & Tradesman October 9, 2006

38 Banker & Tradesman August 21, 2006

39 Banker & Tradesman September 18, 2006

40 Banker & Tradesman August 2007

41 September 2007

42 Reading the Data, Locally Elevator Out of Order Use Stairs Stairs Out of Order Use Elevator Signs - Boston Common Parking Garage

43 Databases Your Own Banker and Tradesman (statistical history) Not Cleaned up No verification Can contain non-arms length sales Multiple Listing Service, Property Information Network Good statistical analysis can be modified to property type, separate time frames, etc. Listing information must be maintained on a month to month basis Great sales information List Price vs. Sales Price Days on the market Main Drawback it is not a total sample of the market

44 SOURCES OF LOCAL DATA

45 Median Sale Price The Lynn Market Lynn Median Sales Price, Single Family Homes, $130,000 $110,000 $90,000 $70, Year Source: The Warren Group Townstats

46 Median Sale Price Different Market Respond to Down Markets in Different Ways Median Sales Price, Lynn and Belchertown $140,000 $130,000 $120,000 $110,000 $100,000 $90,000 $80,000 $70, Lynn Belchertown Year Source: The Warren Group Townstats

47 Mdeian Sale Price Different Markets - Continued Median Sales Prices Lynn/Lynnfield $270,000 $220,000 $170,000 $120,000 $70,000 Lynn Lynnfield Year Source: The Warren Group Townstats

48 Sale Price in Thousands Within the Same Community Different Classes Change in Different ways Median Sales Price Condos vs Single Family Homes, Lynn $140 $120 $100 $80 $60 $40 $20 $ Condos Single Family Year Source: The Warren Group Townstats

49 Assessed Value Disparities Between Land and Building Values in an Appreciating Market Total Value vs Building Value 1999 and 2007 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Total Value Building Value Fiscal Year Source: Belmont Town Hall Records

50 Sale Price in Thousands Number of Sales Median Sales Price vs. Units Sold Median Sales Price Condos vs Single Family Homes, Lynn Sales Volume Condos vs. Single Fmily Homes, Lynn $140 $120 $100 $80 $60 $40 $20 $ Year Condos Single Family Year Condos 1 Family Median Sales Price Single Family vs. Condos Sales - Single Family vs. Condos Source: The Warren Group Townstats

51 Enough of the Past

52 Median Sales Price State All Sales Single Family Condos 0 Source: The Warren Group Townstats

53 Volume of sales state wide All Sales Single Fam. Condos Source: The Warren Group Townstats

54 Number of Sales Metropolitan Boston Suffolk Essex Middlesex Norfolk Source: The Warren Group Townstats

55 Number of Sales South Metropolitan Boston Norfolk Bristol Plymouth Source: The Warren Group Townstats

56 Number of Sales Cape Cod and the Islands Barnstable Dukes Nantucket Source: The Warren Group Townstats

57 Nantucket and Martha s Vineyard - detail Nantucket Dukes Source: The Warren Group Townstats

58 Number of Sales, Central to Western Massachusetts Worcester Hampden Hampshire Franklin Source: The Warren Group Townstats

59 Detail, Hampshire and Franklin Counties Hampshire Franklin Source: The Warren Group Townstats

60 Number of Sales Berkshire County Berkshire Berkshire Source: The Warren Group Townstats

61 Median Sales Price Single Family Homes - Metropolitan Boston Suffolk Essex Middlesex Norfolk Source: The Warren Group Townstats

62 Median Sales Price Single Family Homes South Shore Norfolk Plymouth Bristol Source: The Warren Group Townstats

63 Median Sales Price, Cape and Islands Barnstable Dukes Nantucket Source: The Warren Group Townstats

64 Median Sales Price, Worcester, Franklin, Hampden, Franklin Counties Worcester Hampden Hampshire Franklin 0 Source: The Warren Group Townstats

65 Median Sales Price, Berkshire County Berkshire Berkshire Source: The Warren Group Townstats

66 Lynn Market Single Family Sales vs. Condominiums Median Sales Price Sales Volume Single Family Condo Single Family Condo 0 0 Source: The Warren Group Townstats

67 Lynn vs. Lynnfield Median Sales Price Lynnfield Lynn Source: The Warren Group Townstats

68 Recent Sales Price Trends Five different Massachusetts towns North Reading Sandwich Amherst Auburn Stockbridge 0 Source: The Warren Group Townstats

69 Looking Past Your Own Community Markets do not operate in a void and generally what happens in one community carries through in other similar communities Locate a town near yours that is similar North Reading is similar to Middleton Lynnfield is similar to Topsfield Belmont is similar to Newton

70 Tracking Other Communities Gives you more in-depth knowledge of the market Gives a more broad base of the market research Makes a better argument when talking to taxpayers Allows the taxpayer to understand that the values you are generating are reflected not only in your community but in similar communities

71 Similar Towns Following Similar Paths $500,000 $450,000 $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 North Reading Middleton Source: The Warren Group Townstats

72 Consider the Competition Look at competing listings and listing trends statically and individually Look at current listings and how their asking prices compare to your projected assessments

73 Try and Anticipate What Will Be Happening in the Future Easy for Assessors - we are constantly living in our future Look at present listings as opposed to the listing amounts that existed at your as of. Is the market trending up or down? Look at current inventory levels Is there an over supply? If so, is it increasing? How long would it take to absorb the current inventory? Current inventory/sales per month = months of inventory

74 Taking What is Happening to the Taxpayer It s not enough in the profession to be right You constantly have to bring it to the public In working at the counter Taking your observations to the individual taxpayer Posting pertinent graphs that support your actions and research Press releases Informing the public through press releases and informative articles Telling taxpayers what they need to know, but don t want to hear Declining values do not translate into lower taxes Values are not always declining as steeply or as consistently as reported in regional papers Sub-markets (commercial, condo, multi-family) often run counter to regional trends Your town may not be acting consistently with the market or as reported in the media