The Corson Residential Report

A recent blog in the Baltimore Sun revealed some of the pitfalls of using Zillow.com to estimate the value of your home.  Yes, I know it is a self-serving article, but it does not make it any less true.  If accuracy does not matter and you just want a "quick and dirty" estimate of value, go right ahead. If you need an estimate to make a buying, selling, investing, lending decision, get a professional.  If you need to know what the property is worth because you are the personal representative of an estate or if you are involved in some legal matter such as divorce, bankruptcy or a dissolution of a partnership, Zillow.com is not going to be satisfactory.  There is no substitute for an experienced appraiser you trust to get an unbiased, supportable, and reliable estimate of value.  An accurate appraisal with detailed market analysis will cost you about $400.  What will an inaccurate and unreliable computer generated valuation cost?

http://weblogs.baltimoresun.com/business/realestate/blog/2010/02/zillows_homevalue_estimates_criticized.html

I am linking to an article from Bloomberg.com regarding the president's proposal to stop foreclosures, well sort of.  The proposed law “prohibits referral to foreclosure until borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed."  HAMP is the Home Affordable Modification Program. 

In my opinion, this is just forstalling the inevitable.  With 25 percent of homes underwater, ARM's adjusting upward, and unemployment growing unabated, you can count on continued foreclosures and short sales for at least the next year or two. According to RealtyTrac, Inc., there were 2.82 million properties lost to foreclosure last year and 4.5 million filings are expected in 2010.

Even in Harford County, foreclosures are a problem.  In 2008, there were 967 absentee trustee filings and in 2009 there were approximately 1,500.  That is 125 per month.  This expands the supply of houses for sale at a time when demand is down, a recipe for lower prices.  According the MRIS, the median sale price of houses in Harford County declined approximately 8 percent over the past year. 

My solution is simple: cut taxes, cut government spending, stop over regulating every aspect of our lives, and set the American people free to be the creators and innovators they are.  Once we are unleased to make a profit, jobs will come back, foreclosures will subside, and real estate values will finally stablize.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ahuuwBS8KYq8

Another statistic that reflects demand in the residential real estate market is new construction building permits.   Over the past 20 years, Harford County has ranged anywhere from 1,500 to 2,700 units per year.  As you can image the wheels started to come off the cart in 2006 with 740 permits.  It slowed to 633 units in 2007 and plummetted to 396 units in 2008.  Within those totals, the county includes: single family detached, townhouses, modulars, condos, mobile homes, and apartments.

Year to date, there have been 437 building permits issued in Harford County which sounds like an improvement, but you have to break the numbers down a little to get some perspective.  Within the 437 permits, 84 were for apartments.  If you look at the stats over the past several years, there were zero permits for apartment units.  If you take out the 84, there were 353 permits for what could be described as mostly owner occupant units.  So we are virtually on the same pace as last year.

I find the apartment statistics interesting.  I can only speculate that there is a perceived demand for rental units as a reaction to the economic conditions.  It is my understanding that many of the BRAC folks moving into the area will be renting.  Perhaps that is a reason.  Maybe another factor could be the large amount of people who have lost there homes because of foreclosure.  Possibly the much stricter mortgage underwriting guidelines have kept many buyers, especially first timers, out of the purchase market.  What do you think?

One way of measuring demand in the local maket is to look at lot sales.  For most of the past decade, Harford County has averaged 10 to 15 lot sales per month.  Over the past couple of years, the pace of sales has decreased by approximately 75 percent.  Year to date, there have been 28 building lot sales as reported by MRIS.  This is an absorption rate of 3.1 sales per month.  The current active inventory is 292 as of this posting.  Given the current absorption rate, there is a a 94 month supply of lots for sale.  This means that if no other lots come on the market, it would take 7.8 years to sell all of the inventory.  All of this inventory relative to demand has placed a downward pressure on prices.  My analysis is showing anywhere from 20 to 30 percent drop in lot prices over the past couple of years.

If you have been paying attention to what has been going on nationally, you know we just came out of the worst three months in American history for the number of foreclosures.  Well, I have been keeping track of foreclosures in Harford County and it is not pretty.

During the first 9 months of 2009, there were 1,108 substitute trustee filings (foreclusures).  In June there were 155 filings and in July there were a whopping 172 filings.  The slowest month was February when there were "only" 93 filings.   During 2008, we had a total of 967 which is bad enough.  We are already more than 100 filings over last year and we still have three months to go. We are on a pace to have nearly 1,500 foreclosure filings in 2009. 

I spoke with a client of mine who handles hundreds of properties in various states of foreclusure.   He told me that the overwhelming majoritiy (95%) of these foreclosure properties are being purchased by owner occupants, not investors.  This situation is forcing prices downward.  I often hear people say they are going to wait to do something until the prices stablize and start going back up.  If you are waiting for prices to return to pre-recession levels, you will be waiting for years.  What we are going through right now is historic.  The sooner you come to grips with the reality of our circumstances, the sooner you will be able to adapt and survive.

I am linking to a CNN/Money report on the latest statistics reported by RealtyTrac.  The last quarter were the worst three months of foreclosures in history.  Also, there were 514,000 more jobless claims last month.  "Experts" see this as good news because it is below the 525,000 claims they anticipated.  There have been 7.2 millions jobs losts since the recession offically began in December 2007.  I also linked to this story.  These news stories just support my contention in this blog last week about prospects for an improving real estate market.

I am working on foreclosure stats for Harford County.  I'll keep you posted.

http://money.cnn.com/2009/10/15/real_estate/foreclosure_crisis_deepens/?postversion=2009101507

http://news.yahoo.com/s/ap/20091015/ap_on_bi_go_ec_fi/us_economy

Perhaps the most common question I get is, "Where is the real estate market headed?"  Or, "Have we hit the bottom yet?"  Since I don't have a crystal ball, the simple answer is I don't know.  However, I have been the real estate business for over 25 years and analyze the market on a daily basis as well as follow national and world events.  This country has been through many recessions, depressions and panics only to quickly bounce back to be even better.  Under normal circumstances I, being the natural optimist, would say the future is bright, things will turn around. However, there is something different about this economic challenge. 

We have a political leadership that is doing the exact opposite of what should be done.  It is a command and control regime at virtually every level of government.  Taxes are being raised and new taxes are being proposed including a VAT (value added tax), cap and trade, national health care.  Government spending is off the charts artificially propping up automakers, banks, and financial institutions.  The Fed is printing money at an unprecidented pace.  We are having a difficult time selling our debt.  Oil producing countries along with China and Japan have been secretly looking for ways to drop the US dollar as a reserve currency.

So what does all of that have to do with our local real estate market?  We will soon hit a wall where the world will stop buying our treasuries.  In order to coax them into buying our debt, interest rates will have to be raised.  Not only will it destroy banks, it will have a direct impact on effective purchasing power for everything including housing. 

Unemployment nationally and statewide has been trending upward for more than a year according to the Department of Labor statistics.  Also, the average hours worked per week is declining.  People are either out of work, under employed, or afraid they may lose their job.  People don't buy houses unless they feel secure in their job.  This will impact housing.

Foreclosures and bankruptcies are still growing.  I have performed more appraisals for bankruptcy cases this year than I have in all of my previous 23 years combined as appraiser.  The inventory of housing is relatively high, but the percentage of distress sales, especially in certain market areas is placing a downward pressure on values.

What about BRAC? Oh yes, the great savior of the local market.  I'll believe it when I see it.  To be sure, there have been many moving into the area.  Some are buying and some are renting.  This has certainly mitigated against what could have been an even worse market.  The problem is that the inventory is so high, even hundreds of new workers moving into the area are hardly making a dent.

What about the $8,000 first time homebuyer tax credit?  Any economist worth his salt would say it merely serves to artificially prop up prices.  It can't continue ad infinitum.  Eventually, the tax credit will cease to exist and the market price will fall to its natural equilibrium point.  The folks who bought with the tax credit could see their home values fall and create a new crop of people upside down on their mortgages.

So to answer the questions, "Where is the residential real estate market headed?"and "Have we hit bottom?", I'll just say this:   When our rulers decide to cut taxes, spending, borrowing, and printing money, things will get better.   When they set the American people free to produce, create, and, yes, make an honest profit, the real estate market will rebound.  In the meantime, you may want to think about buying some gold.

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