The Corson Residential Report

During the first week of ever third year, you will receive your brand new property tax assessment.  This year the lucky third of Harford Countians are in the Route 40 corridor.  I would imagine the assessments will be totally out of sync with current market conditions.

According to a recent article in The Aegis, the Maryland Department of Assessment and Taxation indicates the average assessment increased approximately 5 percent for residential properties and 23.4 percent for commercial real estate.  How could this happen when everyone knows values are dropping?

First, you have to understand the assessment process.   They don't use the same methods appraisers like myself use.  I appraise one house at a time.  I go into each house, look at the inside of the property, find out what upgrades and improvements were made or are necessary.   A good appraiser is doing one perhaps two per day. The assessment office is estimating the value of over 35,000 houses every year.  You would need a hundred assessors to do it the same way.  The local office has a handful of people on staff.  Also, would you want the tax man to enter your house and look around?

To assess tens of thousands of house, they use a method known as mass appraising.   They analyze average costs per square foot and they also look at comparable sales in the area.  In my 25 years in real estate, it has been my experience that the assessments are usually lower than real market value.  The problem this year is that the market changed significantly after they analyzed the sales.  The market absolutely cratered in the last quarter of 2008.  To be fair to the tax man, there is no way they can be that up to date with the vast numbers of properties they are assessing.  It's just physically impossible.

So what happens when you get your assessment and you think it is too high?  The state already provides a process for appeal.  For new reassessments, you simply send in an appeal form within 45 days. (This would put the deadline around mid-February.)  You can either meet in person with the assessor or they will do a telephone meeting if you can't take time from work.

I did this several years ago with a rental property I had in Baltimore City.  The tax assessor really jacked up my taxes unfairly so I appealed.  I met with the assessor in is little office.  It was very informal and relaxed.  I simply sat down with the assessor showed him all of the recent comparable sales in the immediate area and politely asked for him to reconsider.  Within a few weeks I received a letter from the assessment office stating they were reducing my assessment.  They met me about half way.  To me, this was a success.

The point of telling you this story is to give you some advice on how to handle the assessor.  If you go in with "guns a blazin," you will make the assessor very defensive and likely he will dig in his heels.  If you really want the desired results, you need to be armed with information and use reason and logic.  You have to help him save face.  Let him know that you understand the challenges he faces.  Provide good comparable sales data or consider providing an unbiased, professional appraisal. 

A typical appraisal will cost you $350.  For assessment appeals, I would provide a summary report instead a full blown lender-style appraisal for less.  You would need to call for a quote since I need to know what type of house I am dealing with.  Depending on the amount of decrease, it may be worth the cost.  The Harford County tax rate is $1.08 per thousand of assessed value.  To break even, the assessment would have to be reduced $32,400 or $11,000 per year if it is phased in.  After talking with you, I'll tell you if it is worth it.  I am not going to do an appraisal for you if I don't think it will help you.

Use this link to find out more about the appeal process and downloads to necessary forms:   http://www.dat.stat.md.us/sdatweb/appeal.html

Perhaps the most prevelant question I encounter is, "How much more will my home value decline?"  Of course, no one really knows for sure, but we could use past history as a guide.  For the most part, home prices track income.  Since WWII, there has been a direct correlation between what economists call effective purchasing power and home prices. 

According to a recent article in USAToday.com, home values increased 0.5 percent from 1950 through 2000 after adjusting for inflation.  During the period of 2002 to 2006, the USA experienced a freakish 8.2 percent with a peak of 12.3 percent increase in 2005 much of which was completely distorted by easy credit, adjustable rate, zero interest, and sub-prime mortgages.  During the peak years in Harford County, I measured appreciation rates of anywhere between 15 percent to over 20 percent per year.  It was clearly unsustainable.  We knew it would not last.  Many of us who had been in the real estate business for any length of time would always wonder when, not if, it would stop.

The "canary in the coal mine" for me was a house in Stoneridge.  It was a corporate relocation appraisal I did in September 2005.  It was a nice house with no major issues.  Given the community's recent sales history, it should have sold for full price within 30 to 60 days.  It actually took over five months to sell and for considerably less than my appraised value.  In early 2006 after I saw the closing price, I knew the party was over.

So getting back to the question at hand, "How low will we go?"  The experts in the aforementioned USATODAY.com article estimate values will drop ANOTHER 17 percent if we assume the traditional price to income relationship. I know it's hard to wrap your mind around that, but I think it is probably pretty close.  Prices have to come into alignment with what people can actually afford using traditional mortgage underwriting guidelines. 

I did a little experiment with my own house as a test.  I assumed my house should have increase approximately five percent (includes inflation) per year since 2001.  That number was exactly 17 percent less than its current value.  There may be something to this theory.

So what does this mean to you.  Well, if you are a lender, you need to be extremely careful because there is a good chance some of your collateral could evaporate during the next couple of years. If you are a borrower, you could be upside down real fast if you have a high LTV.  If you are a real estate agent, you need to educate your buyers and sellers and protect them from making a big mistake.  You've been warned. 

All comments and rejoinders are welcomed and encouraged for this or any other posting.

The actual article cited in this blog can be found at:

http://www.usatoday.com/money/economy/housing/2008-12-12-homeprices_N.htm

Did anyone see the "60 Minutes" report this evening (12/14/2008) on the "second wave" of foreclosures?  It was frightening!  This is the link to the story from from reporter Scott Pelleyposted on CBS News http://www.cbsnews.com/stories/2008/12/12/60minutes/main4666112.shtml 

Everyone knows that the first wave of foreclosures were spawned by sub-prime loans made to people who would never have qualified for more traditional loans.  Well, the next round of foreclosures will come from certain types of adjustable rate loans which are scheduled to reset at much higher rates during the next few years.  What is really scary is that a large proportion of these loans are defaulting during the low, introductory rates.  The analyst they interviewed predicted that it will take years for the country to get out from under the massive amount of inventory on the market.  This can only drive priced down even lower.

As we all know, however, location is a key influence of value.  How will this mess affect the Baltimore metro area, and in particular, Harford County?  Unfortunately, we are not immune to all of foreclosures on all of these bad loans made during the past several years.  However, employment stability also has an impact on the housing market.  Fortunately, the area has an extremely diverse employment base and is not solely dependent on any one industry.  The migration of jobs into Harford County from BRAC (Base Realignment Commission) should help to mitigate an otherwise weak housing market.  Another source of thousands jobs positively affecting the metro area is the Johns Hopkins Hospital's biomedical and other research laboratories.

I guess the bottom line as I see it is that Harford County real estate will continue to muddle through the most challenging market in a generation.  I have to be careful with predictions, but I believe prices will continue to decline through 2009. How much, nobody really knows.  When the BRAC jobs start coming online in 2010, then we may have a better handle on what will happen with real estate values.

On a side note, I have avoided writing a blog because, quite honestly, I knew the market was going to go south for some time.  I just did not want to bring you negative news.  If you know anything about me, you know that I am an optimistic person by nature.  However, most of my clients count on me to "keep it real."  In embarking on a more regular blog, I will be honest with you about what I see going on out there, but I will do everything I can to provide useful and positive information as well.

Talk to you soon,

Dom Corson

Every year, the National Association of Realtors in conjunction with Remodeling Magazine publishes a list of various home improvements and the percentage of value they add. Every year it becomes increasingly frustrating to see NAR roll out the same nonsense with local and major media, not to mention real estate professionals quoting it like mindless automatons. Although the NAR survey has thousands of respondents comprised of appraisers, agents and brokers, with methods that give the appearance of being scientific, the results are unreliable and inconsistent. It’s not that they are trying to be misleading. It’s just that everyone is looking for a “ballpark” figure or a “rule of thumb” and they simply don’t exist. For instance, the survey suggests that a basic bathroom remodel in Baltimore supposedly yielded a 70 percent return on cost, in Philadelphia the same project would only garner a 60 percent return, and in Detroit you could expect 46 percent. The survey is riddled with similar wacky results leading any critically thinking person to question their reliability.

Perhaps the most common questions homeowners have before committing to a major renovation or remodeling job are: “What can I do to increase the value of my house? Will this project increase the value of my house? “Should I do this project?” Unfortunately, the NAR survey serves to confuse and perpetuate the same myths about remodeling every single year. The true answer to the aforementioned questions is simply, “It depends.” Everyone is looking for a one-size-fits-all answer, but it really comes down to each individual’s situation. One’s decision to remodel depends on location, market segment, current property condition, and timing.

There are many projects that will increase the value of your home. Unfortunately, there are few things you can do to your house that will increase the value greater than the cost. If needed, fresh paint, new carpet and general clean up almost always give the greatest return relative to the cost of doing the project. However, what about a room addition, a new kitchen/bath, finished basement, or deck/patio? Once again, it depends.

Suppose you are considering a major renovation or addition. You need to answer some questions. What does the market expect from a house in this particular neighborhood or market area? Is it in an area where buyers expect high quality materials or does the area require something a little less ostentatious? If you are a real estate agent, you need to know buyer expectations. A first time home buyer will be less demanding than a move up buyer or the dream home buyer.

You also have to consider the current condition of the existing improvements. Your old kitchen may be a little dated, but does it still function? If it still has some remaining economic value, renovation may be premature. An extreme example will help make the point. Suppose you have a new house and you immediately “gut” the kitchen and install a brand new $40,000 kitchen. Would the value of your house increase by $40,000? Clearly, the value would not increase because the original kitchen met current standards and had not physically or functionally depreciated. Now, if the kitchen was 30 years old and did not meet market expectations and it has fully depreciated, a new kitchen is warranted. The tougher question comes when the kitchen is between 15 and 20 years old. At this point you have to consider how long you plan on staying in the home.

Your time horizon is an important part of the decision making process. Are you the type who gets transferred every couple of years? If you move on a regular basis because of your career, you have to be circumspect before committing to major renovations. Investing tens of thousands of dollars in a possible over-improvement and then immediately having to sell would be a big mistake. Rapid appreciation such as we experienced over the past few years when values were rising 15 to 20 percent annually can usually erase any mistake, but if you are in a declining market (like what we are in presently) you need to be more prudent. If you plan on staying for a long time (at least five to ten years), your decision is much easier.

Simply put, within reason, do what you want. Remember that real estate is just as much shelter as it is an investment. You should enjoy your home, but don’t be foolish either.

My next seminar is "Valuing A Home" which is being sponsored by the Harford County Association of Realtors will be held on Thursday, January 22, 2009 from 10:00 am - 11:30 am.  This class has been submitted for approval to the Maryland Real Estate Commission for 1.5 hours of C.E. credit.  It will be held at the HCAR Classroom, 2227 Old Emmorton Road, Unit 117, Bel Air, MD  21015.  For more information call 410-569-0750 or register on-line at www.HarfordRealtors.com.

This 90 minute seminar is designed to assist the real estate agent in estimating the value a home. This is not an appraisal course. This seminar will stress the importance of arriving at a reasonable listing price and purchase offer. It is particularly important during current market conditions.  This will be a hands on class where we will analyze live data and make sense of the wealth of information provided by MRIS. You will not be staring at the clock during this class.

I look forward to seeing you there,

Dom Corson

I know this is an appraisal web site and information about values and the real estate market is why you are here, and I promise that will be the main focus, but my first post in this blog regards my cousin Tony's son, Dominic, who was viciously attacked by a pit bull in the alley behind his house in Towson recently.  Dominic's friend, Scotty was actually attacked first.  You may have heard about it on the local news.

Fortunately, the dog was put to sleep.  I guess that is OK, but it was just an animal.  What do you do with the owner?  It's one thing if the dog accidently escapes its cage, but it is another when the owner acts so irresponsibly.  If you haven't heard, police reports and testimony so far indicate that the owner brought Scotty into his house after the first attack.  He cleaned him up and then "allegedly" told the boy that if he told his mother he would get him.  If that is not bad enough, the pit bull was placed back into the defective cage and escaped again only to attack Dominic.  This time, the owner "allegedly" took the dog into the house, but left Dominic bleeding in the alley.  If that's not criminal, I don't know what is!

Dominic is improving every day because he is a courageous boy who has the love and support of a great family, but he is still really messed up and is facing a long and painful recover.  Please keep him and his family in your prayers.

Dominic Corson