AUTHOR: Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors, 936 San Jacinto St., Redlands, CA 92373, Real Estate Appraisals, Consulting, Expert Testimony, Forensic Reviews, Fraud Research and Analysis, Litigation Support, Fraud Training 909-798-8855, fax: 909-798-0139
We may all be faced with clients wanting us to not only measure the present market value, but also consider the amount of supply presently on the market, as well as the number of buyers in the market. They may want us to check on and know how many sales occurred in the last month, how many listings there are on the market now, and how many pendings there are.
A Knowing is a term I learned from Dr. Wayne Dyer. A belief system he says, is one that is given or imposed upon us. A knowing is something that comes from within, from our own personal discoveries, from knowledge we gained first hand. Our beliefs can be shaken or changed by outside influences. Our knowing cannot, as it is a part of our fabric.
Actually knowing the inventory levels of the markets we maintain geographic competency in is a good thing. Conveying our knowledge to the stream-of-commerce that relies upon our reports is a good thing too. Why not do everything we can as succinctly as possible to demonstrate our knowledge of the market? Why not create demand for our services by creating a product that stands head and shoulders above that of the average Dick and Jane appraiser?
Our reports can actually be a form of advertising of who we think we are as appraisers. If we think we really know what we are doing, or have the desire for that type of reputation, we can start, each of us, down a path that will allow us to reach a knowing.
Those appraisers who actually know where the market is and what it is doing in their area, cannot be pushed around by clients of any type or sort. Those that do not know, can.
The point of this article is to provide a simple technique that all can embrace and employ that will allow for a certain level of knowing about your markets. With just a few steps we all can make ourselves sound smarter on paper than our competition. What a competitive advantage !
Read the following paragraph and then the learning begins: Click here
This just in: California houses still unaffordable
Posted: 23 Aug 2007 10:09 PM CDT
Surprise -- the California Building Industry Association said in a second-quarter report today that California housing is still the least affordable in the nation. This despite all we have read and heard about that California is among the hardest-hit states in terms of sub-prime exposure, notices of default and foreclosures. Prices simply are not declining enough, if at all, in many areas.
Statewide, the quarterly index was actually up: 11.7 percent of all homes sold could be afforded by a median-income family, compared with 11.2 percent in the first quarter. But in 17 metropolitan areas in the state, housing was less affordable compared with the previous quarter. Housing was more affordable in 8 metropolitan areas.
Though this article appeared in the Square Foot Real Estate Blog out of San Jose, the fundamentals are the same. Using my Zip Code as an example, one that you can follow by merely supplanting your local data for that used here. Do not use my numbers, use those that apply in the neighborhood in which you are working. What I use are commonly published numbers.
- Household Incomes,
- Average Sales Prices,
- Mortgage Interest Rates
- Loan Constants
- And some 5th grade math.
The Average Sales Price on homes reached almost $600,000 in my area. The average Household Income is approximately $54,000. At a 6.75% Interest Rate with a 33% Underwriting Ratio, presuming $300 in consumer debt payments (cars, credit cards, etc), I can calculate where the value level of supportable demand is for my area. This can then be compared to where the prices are now, where they were at the peak. My market peaked in March of 2006 and is down over 15% so far. Knowing this is a good thing. Knowing how far it is likely to go down is a good thing too. Especially if the clients start asking for a Future Value.
So, if they do start asking for this level of analysis, what do we need to know to be able to give them a good answer? Not a lot really, just some basic things. We need to understand Supply and Demand Analysis and to know what kind of buyers are in the market. OK, so we have to talk to those who are actually in the market, we can't get this stuff by looking at our databases. So what? It gives us an opportunity to talk to people dealing with buyers in the current marketplace, under current market conditions. Yeah man, now we are cookin!
Understanding what creates Supportable Demand is to understand the segments that make it up. In my market's we went through a period of years where demand was coming from outside influences. In the Inland Empire Region of Southern California that I work, we had buyers coming from Los Angeles, Orange, and San Diego Counties in general, and as it relates to certain sub markets like the Palms Springs-Coachella Valley, from across the Country and Canada.
This outside demand telescoped out the Interstate Freeway System beyond the 60-Mile radius around the Metro Market, to outlying communities on the fringes of the civilized edges of the Region.
This outside demand included speculators, investors, 1031 Tax Exchangers, flippers, real estate gamblers, and fraudsters to boot. The combination of this outside demand and the way that lending programs were created, all the hybrid loans, the no qualifier or Liar Loans, fueled a speculative boom that caused prices to soar in the cheap areas. In the Barstow market, 100+- miles from L.A. we saw the low end of the market double in less than a year. The same was true in 29- Palms. OK, so those areas are now going down faster than others, over 30% since the Peak.
The point is . . Regardless of how over-priced an area became during the boom years [which was based more on speculative demand than supportable demand] what we are seeking today is to understand where prices will level out.
Using the Zip Code of the market we are measuring, or in the case of a specific neighborhood within the Zip Code such as a Census Tract or even a School District; allows us to calculate the Supportable Demand for the Price Level of the area.
Using $600,000 as an Average Price and $54,000 as the Household Income, and a 6.75% Rate, we can calculate the supportable demand, absent the outside speculative buyers. They are now gone from this market, now we are left with the people who live here.
It is OK that there are other influences working in specific markets that are brining in outside buyers or investors. In many states, there are Wealth Creation Clubs that bring in outside investors and pack them into over priced houses with wild promises of incredible returns on a passive investment. Scummy, yes. Does it work for the perps, yes. Are people being scammed, yes.
Supportable demand from the local yokels that make up our individual markets. We are searching for a way to objectify our measurement abilities. Yes we can measure how low the prices will go.
Here we go now:
- Household Incomes: $54,000
- Average Sales Price: $600,000
- Consumer Debt: $300 monthly
- Mortgage Rate: 6.75%, 39 year, amortized
- Underwriting Ratio: 33%
$50,400 X 33% = $16,632. This is the amount available for Loan Servicing, or the Monthly Payments. So, $16,632 -:- 12 = $1,386
How much of a Mortgage will $1,386 support at a 6.75% rate? At a 6.25% rate, and at a 5.75% rate? Or at any rate you choose? You can go to www.bankrate.com and calculate the monthly payment for any rate using the 30 mortgage and a $1,000 loan amount, will give you the monthly payment. Divide the $1,386 or what ever you calculate for your Market and you have the Loan Amount that the income will support. Several calculations were made as follows:
- 6.75% = $213,000
- 6.25% =$225,000
- 5.75% = $237,300
- 7.25% = $203,200
- 7.75% = $193,500
If we use 6.25%, then from my example, a $225,000 loan amount is supportable in my area. That plus a Down Payment will provide the level at which there is Supportable Demand.
Once we have calculated Supportable Demand for any given Market, we can compare it with where the Average Prices are now. The difference is subject to being lost over time as this Market matures.
We are in a Declining Market Cycle now, with the majority of all Metro Markets reporting declining prices. This is momentous, a first since the Great Depression of the 1930's.
Absent outside buyers invading an area with pockets full of cash, basic underwriting guidelines and interest rates provide the measure of where Supportable Demand lies, given the Household Income of the Market you are measuring.
Assuming a certain amount of move-up buyers such that the average down payment in my market is $75,000. Then, $225,000 + $75,000 = $300,000. This is where there is structural support from the prevailing Household Incomes of my example market.
Take the peak price of $600,000 {in round numbers} and deduct the Supportable Demand number and you get the potential Value Decline. So, $600,000 - $300,000 -:- $600,000 = 50%.
When I first predicted in 2006 that we would see 25% to 50% price declines from the peak in all the formerly hot markets, it seemed radical to some. Take what you learned here and apply it to your markets and see what you come up with.
Can Appraisers Predict the Future? Some can, and some cannot and some do not want to admit what is happening. Which category we fall into is a function of our awareness.
We started on a Cycle last year, that will take at least 5-years to complete. Each of us needs to figure out how we are going to survive it. For me, when Licensing was passed, I decided to get away from lender work as a way to make a living. You can do the same, or hang in there to the bitter end.
In my opinion, those who step up to doing real Market Analysis and measuring their markets rates of change and supply sides will be in the greatest demand.
"Appraisal is only hard if you try to do it right, or if the market is going down, or both."
AUTHOR: Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors, 936 San Jacinto St., Redlands, CA 92373, Real Estate Appraisals, Consulting, Expert Testimony, Forensic Reviews, Fraud Research and Analysis, Litigation Support, Fraud Training 909-798-8855, fax: 909-798-0139
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