The Corson Residential Report

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