The Technocrat & The Money Press ---> (Cntrl + P)

It has been famously remarked that “deficits don’t matter” and this sentiment has clearly/evidently been echoed throughout the economy since the 1980’s. There are many great articles on this subject matter, easily found by merely copy/pasting the quote in a Google search. Printing money is what led to the economic recovery post 2008 with bank bail-outs, and auto industry bail-outs, etc. Technocrat policies of printing money is what will “save” the economy through the COVID-19 pandemic. Paradoxically, spending is saving…

Pontificating about technicalities of monetary policy has caused gut retching confusion and angst among many, myself included. Eric Levitz has written an excellent article on the subject matter titled We’re Paying for Coronavirus Stimulus by Printing Money. And That’s Fine! which clears up much of the mysticism.

So what does that mean for the economy and the housing market? That all remains to be seen but I’d say it will certainly depend on allocation and disbursement…I say again, allocation and disbursement… Where has it gone so far? Well, unemployment is highest since the Great Depression, yet the stock-market is surging…. Those unemployed folk are the current and future real estate market participants, lets not forget. Printing money is only part of the equation.

Cheer$,

IAI

News Brief - Q1 2020

Appraisal Institute Opposes Biden’s Input…

AI: “To be quite frank, the assertion that appraisers would systematically undervalue or overvalue real estate due to these factors is absurd and shows a profound misunderstanding of the real estate valuation profession. Appraisers have nothing to gain by such behavior, and in doing so we would lose the hard-fought public trust we have achieved over many, many years.” Read more

UBS: Fed may cut rate three times this year…

As expected, interest rates are expected to be cut several more times just within the next year. Forget fiscal responsibility, these are fiat-times. When home owners have asked me what I make of interest rates over the years, I have always insisted that they will continue to fall. This summarized story reported by housing wire shows exactly that. Read more.

New Homes Started With 4 or More Bedrooms Trends Lower

Here is an article that concisely points out what I continue to report in many of the reports I’ve devised. Bedroom count and population trends. Of course there are some markets and instances that deviate, where demographics defy the statistics. There are no absolutes yet NAHB data is a prominent/credible source. Relative to this statement, without going into further detail, the appraiser’s objective judgment/reconciliation is the final determination, and that final determination is based on extensive market observation. Read more.

Waning Affordability Contributes to Slower Job Growth

As expected, the NAR has complied a study that brings needed attention to the issue of out-of-sync home price increase, jobs, and incomes. This story is relative to my Peak Market Conditions blog entry which I will aim to update this year. Read more.

Real Estate Appraiser Appreciation Day

Recognition. It has been a LONG, long time coming. I look forward to our representatives ongoing support and follow-through in regards to the imperative importance of the Real Estate Appraiser profession.

Read Bunton's letter to the House: https://appraisalfoundation.sharefile.com/d-s21d088c03b34bbca

Read Bunton's letter to the Senate: https://appraisalfoundation.sharefile.com/d-s2cf2356e1f04312b

Peak Market Conditions

This study pertains to the greater UPS neighborhood of North Tacoma, dating back to the year 2000. It encompasses a designated area description known to my appraisal-peers and industry professionals, that of which generally reflects most the 98406 zip code. The sample of data for each year analyzed is robust and lends credible results; bank-owned data has been excluded. This area has a well balanced blend of homes without many outliers to skew data. It’s an overall fair representation of the market as a whole. Annual Household Median Income data was gathered from the Washington State Office of Financial Management. Historic interest rate data was gathered from Freddie Mac online database.

For the last generation, housing affordability has consistently become worse each year. The most affordable time being in the year 2000 when the annual median income was 28% of the median home price, and then again in 2011 when housing prices had hit bottom as the result of the 2008 Great Recession. The ratio then was 24.4% median-income to median home price.

In 2007- at the peak of the housing market before collapse in the summer of 2008- the median annual income of $56,426 represented 17.6% of the $320,000 median home price. The median annual income for 2018 has yet to be reported however, is estimated to be in the range of $69,450 which is 16.6% of the median home price of $417,500.

In 2007, an initiated loan would have reflected an approximated cost of about $18,259 in annual interest on that $320,000 home based on an average APR of about 6.34% for that year period, and an 90% LTV. In 2018, that $417,500 home at an average APR of 4.54% will have cost about $17,059 in annual interest, assuming a down-payment of $41,750.

So, essentially the cost to borrow money on the 2018 median-price home is comparable to the last time the market experienced such a peak, and the contrasting income-to-price ratios are also nearly the same. The cost still breaks down somewhat differently. The debt/income ratio in 2007 relative to the cost of interest was about 32% of the median income. As of 2018, that figure is about 25%. The market is therein closely teetering on peak-conditions. As usual, interest-rates play a major role in affordability however, that’s only one factor.

So what has changed in the last 12 years since the last real estate peak? Local employment boom is instep with population growth, although income and wealth disparity is well documented. Despite the concentration of higher income jobs in some sectors, median incomes have only modestly increased. The wage of the typical wage earner is not entirely keeping up with the cost of housing.

An unfortunate and looming influence that has a direct and an indirect affect on most wage-earners has been ongoing Consumer Debt. Auto loan, credit card, and student loan debt is the highest it's ever been and continues to fuel the cost-of-living surge. Health care costs continue to soar, one of the largest influences on American credit card debt and bankruptcy. Since this study encompasses household income, the rising cost of childcare has fair mention, if not being a prominent factor.

So, is this the new normal for market behavior and housing prices? Has the median income been reduced to just a mediocre income? How did it get so off balance? What will happen next? There are no defiant answers- well at least not for the latter inquiry of what’s to come.

The sanctity of both lending and monetary policy is ultimately a mystery and is assumed to be sound. That being said, it would not appear that we’ll be seeing another sub-prime meltdown in the housing mortgage market, although other sectors such as auto-loans are up for speculation. The ice-field that sunk the market in 2007 was a combination of a number of issues not limited to- resetting Adjustable-Rate-Mortgages; mortgage payment delinquency en mass; REO saturation; floods of housing inventory across virtually all markets and price ranges; major collapses within the banking sector; credit tightening to the point of a lending-moratorium; and then a tax-payer funded bank bail-out. Unless the NINJA loan of the past is masked by another form of malfeasance, perhaps banking-failure can be ruled out. The fiscal sustainability and responsibility of consumers is perhaps more predictable factor.

Continued population growth to the Puget Sound would appear to be a foreseeable constant for a number reasons that doesn't stop short of employment. Economic studies suggest “pent up demand” of renters and millennial basement-dwellers will keep the pilot-flame lit for future housing spark, putting even more pressure on demand. Still, fundamental income disparity and consumer debt are valiant points of contention that can not and should not be overlooked and leaves major questions moving forward.

The Appraisal Inspection

The question of what an appraiser is looking for during an appraisal interior walk-thru is a major inquiry by home owners, whether or not it is verbally conveyed.  

In short, the appraisal inspection estimates what the market, with participants that are well informed and advised about their options, would consider.  Regarding the physical inspection of the home, this would include, but not limited to, the following:

Physical Condition

The wear and tear of a home is at the foremost of the list.  The level of upkeep for a home is important for a number of reasons including longevity and re-sale value. Impeccable upkeep can sometimes outweigh the prominence of older finish if it has been well maintained.  During the walk-thru, the condition of the home is carefully noted in order to contrast it with other homes in the market place.

Age and Quality of Finish & Short-Lived Items

The age of the finish is carefully noted and discerned.  Have the cabinets been replaced, if so what is the grade of workmanship and materials used?  Maybe the existing cabinets from original build have been re-faced or painted in a transformative manner, or perhaps the original cabinetry is timeless in style/appeal with greater quality than what newer cabinets have to offer.  The quality and appeal of flooring is carefully looked at; not all "hardwood" flooring is equal. Periodic finish features such as pop-corn ceilings, plaster and/or wood-panel walls, and the quality of remodeling are all indicators to a homes age and level up upkeep.  Roofing, furnaces, HWTs, windows, wiring panels, plumbing fixtures, and any other item that is readily-apparent is noted and contrasted with the market place as well as replacement-costs, and level of depreciation.

Design

In addition to upkeep, one of the biggest things I look for is the design of the home.  Yes, a well maintained and updated home is great but if the design is obtuse or antiquated, that is something to strongly consider.  Open-Floor concepts are a big deal right now; Formal-Concept living is usually a thing of the past; yet the comparative market still has the ultimate say.  The layout of the home and the relation of rooms, potential for future/feasible floor-plan reconfiguration is carefully considered.  Some homes have very harmonious floor-plans with great flow, others not so much.  Some homes have excellent potential for transition to a more appealing layout with minimal cost; others are possible but with a slough of remodeling costs; some homes are destine to be leveled if the market beckons re-gentrification/infill; some homes are timeless specimens of design which can be possible across all price ranges and styles.  

Structure

Bottom line is that appraisers are not home-inspectors; home-inspectors are not structural engineers; and none of the inverse relationships of these parties can certify what the other is or is not doing.  Appraisers are trained to observe building characteristics and construction methodology which can be implored upon conducting an appraisal report.  To delve into structural engineering issues is beyond the scope of the typical appraisal assignment.   

The appraisal makes clear assumptions in the report regarding the sanctity and structural integrity of the home.  Some inadequacies and issues are readily apparent and can be called out as warranting repair/alteration or further inspection.  Ultimately, what is going on between the walls of a home is a mystery to all of the aforementioned however, there are definite indicators and patterns that a home will reveal to a trained eye that can offer clear/convincing evidence to support suggestions/findings.   

Mastering Objectivity

The appraisal practice is an impartial, unbiased, objective process of determining the most probable price paid for a home.  Few understand that this process relies upon great research and assessment to ascertain the meaning of market participants, their motivations, and potential response to an infinitude of influences. 

Separating out personal opinion, and exercising scientific reasoning is a challenging task for most human beings, particularly because our cultivated ways of perception doesn't usually reside upon objectivity; the Socratic Dialogue is an atrophied process in our world, to say the least.  

The Uniform Standards of Professional Appraisal Practice acts like a rail-road to keep the appraisal practitioner honest in his/her workings, something that was implemented post the Savings and Loan Crisis of the 1980's in order to lay the ground work for objective practice that protects the public interest.  

Sifting through the seeming chaos of the market place, the cyclical histories that have illuminated the pathway time and time again, and reporting the extent of its influences on value is by no means an easy task.  It weighs heavy upon the mind.  Face-value media sources- that which typically ask soft questions about virtually everything- score markets as climbing without regard for the economists input on the sanctity of monetary policy or consumer debt.

Contrasts.... Grasping the tenements of a sane approach to diplomatic reasoning, or at the very least a sustainable real estate market and economy, as contrasted with the present day landscape, offers rich information to cause and affect.  Therein, capturing the market place in its honest state of being- for better and worse- is my practice so that reader can visualize the full vernacular of the market place.

Design Matters

This exhibit from the National Association of Home Builders is now 3-years old.  At the time of this survey, 60-84% of demand was for some sort of open-floor design; the trend has surely increased since then from my experience of appraising new construction and remodeled homes.  

The trend for open-floor living resides in cultural and life-style changes.  NAHB does in depth studies using demographic research in addition to surveys.  Home buyers are getting younger, they work a ton, and their domestic relations are quite a contrast of what they were in the mid-century.  A lifestyle that is fast paced, multi-tasked, needs efficiency which is what an open-floor plan has to offer.  Cook, entertain, within view of the flat screen; look over your kids or dogs, all at once and all from the kitchen.   

Know The Surroundings

Knowing what abuts a parcel is vital.  I see homes often times marketed as having green-belt privacy or wooded views however, if the bordering/adjacent land is privately owned, chances are that someday it will no longer be a wooded space.  This is an often reality due to the swelling population growth to the area, and land-supply quickly diminishing.  Green spaces once thought as serene might end up being the next new construction.  It may be more obvious in suburban locales however, growth in rural areas such as Fredrickson are turning up cleared expanses for industrial parks that abut housing developments; once appealing views of wooded or vacant plains.

Upon conducting research for a home with vacant land space surrounding it, I always research ownership in addition to other pertinent land-uses/zoning, topography/wet-lands for the area, in order to support findings for potential future use.  A garden variety extraordinary assumption can be useful in instances where the land is identified as privately owned but the intention of the owner is unknown. 

In the example photos, this lot had been wooded for eternity but due to market conditions, it has since been cleared and will likely be a new home in the near future.  The home that sits behind it previously had a nice private/wooded view expanse, perhaps was thought as a beneficial feature by the owner or perhaps even an unsuspecting sales associate or appraiser.... Soon, it will look at the backside of a stick-built home rather than the old-growth timber that once stood there.  What view would you choose?      

Zero Active Homes

As a professional appraiser, and an investor in real estate, I was astounded yet not surprised to see this statistic.  In my neighborhood (NWMLS area 23) there are 0 (zero) Active homes on the market.  In my 15 years in this profession, I've never seen such a figure, at least not upon a fairly adequate sample size of market data (A total of 50 homes in this sample).  It's quite a radical contrast of 18-month housing-supply and markets dominated by 40-70% REO/Short-Sale homes, market conditions that existed within the not too distant past.  

Real Estate: The Inefficient Market

The bottom line is that there is no reason to assume that the real estate market is even close to efficient. You may want to buy a house if you love it and can afford it. But remember that you cannot safely rely on “comparable sales” to judge that the price is fair. The market isn’t efficient enough for that.

ROBERT J. SHILLER
Sterling Professor of Economics, Yale University

The real estate market is not an efficient market, nor rational. Prices vary across the board for an infinite number of reasons. One person may be more motivated to sell than another, while another person may be more educated and well advised upon placing an offer for purchase.  Brokers advise price setting for their clients which can furthermore vary based on the level of expertise they are bringing to the table.  Trends are nonetheless evident and honest differences do indeed exist, although all are dependent upon market variables.

Emotions are a key driver of consumerism, and buying a home can often become an emotional process.  Arbitrary offers for homes are common, both high and low, which defy the cost of land, comparative construction and remodeling cost differences. Diversity of the home styles, neighborhoods, and external influences are only a few variables that overlap one another in a complex weave of obscurity. Different market conditions and trends act like weather, shaping the behavioral landscape of buyers and sellers and the spectrum of possible responses.

Appraisers are taught to analyze data and assert objectivity. The appraisal process attempts to find scientific solutions to the problems to be solved. Some assignments have more clear indicators than others. Mostly, estimated market responses are at best narrowed through sound methodology and expert observations on behalf of the educated appraiser, then reconciled.

The appraiser is simply the messenger, not the creator of the market place yet, he/she can implore fair and educated judgement when necessary. The work of the appraiser, in short, is to establish a proper scope for the assignment, and gather enough relevant/useful information to lend a credible opinion of value. 

Market Overview

Market Conditions analysis is critical to assessing value to a home.  Without an understanding and accurate reporting of the behavior of the market place, market-change is not in focus and opinions of market reactions may therefore not be truly supported.   

DECADE: A MARKET HISTORY

The 2008 Great Recession and Real Estate collapse was precipitated by a financial system meltdown; beginning in the subprime credit sector; relative to falsified/bad loans, unethical lending practices, and in many cases financial irresponsibility on the part of some borrowers.  The market landscape from 2003-2007 resembled current year-over price inflation which resulted in the 2008 collapse, namely due to simultaneous maturation of (previously more affordable/attainable) Adjustable-Rate-Mortgages across the nation, along with other major financial institution failures, which revealed the true spending power of typical Americans.  The result was astounding market correction, and the liquidation of real estate assets as the market was saturated with bank-owned (REO) homes, a period that lasted from approximately 2008-2014.  

During this era, the GSEs and private lenders struggled to reconcile bad mortgages and the ongoing systematic collapse.  Loan Modifications, tax credits, and record low interest rates staved off added inventory and encouraged home purchasing, combating restricted credit/lending, high unemployment and plummeting consumer confidence.  Real Estate investors swooped in to buy up liquidated bank-owned homes which resulted in a renewed house-flipping trend and the regentrification of many neighborhoods. The renewed affordability during this period allowed many to enter the market place just as others were losing their homes to foreclosure.  Real Estate began to regain its place as an equitable investment for Americans, as seen by consumer spending reports within the home-improvement sector, all the more glamorized by house-flipping and home make-over Reality TV shows.

The housing market has since reached total recovery with prices returning to, and often far exceeding, previous peak-pricing seen a decade earlier.  Interest rates still remain at record lows despite angst about increase, and unemployment figures have returned to normal.  The result has been a renewed era of home price inflation and affordability issues.  Lending practices were tightened in order to avoid another credit disaster however, the sanctity of loans relative to true American incomes and real purchasing power remains to be seen... 

CONSUMER SENTIMENT & PURCHASING POWER  

Research of several resources including the NWMLS, HSH.com, and the FNMA- Home Purchase Sentiment Index (HPSI) illustrate similar indications of wavering consumer confidence.  HSH.com indicates that median incomes in the Puget Sound area are not keeping pace with house-price inflation, and would need to increase by four-times the average annual increase in order to keep sustainable pace with home prices in many of the regions markets.  Such statistics lend an example of disparagement; wage stagnation among working Americans has continued to be emphasized by chief economists in several sectors of the economy.  Research of Puget Sound median-incomes, contrasted with average national expenditures per BLS.gov supports such reoccurring findings and raises questions about purchasing power, especially as the cost of living and housing prices increases at current rates.  A recent Seattle Times publication affirms such findings, pointing to the matter of fact that wages are stagnant and unsustainable relative to the accelerating cost of housing, let alone the general cost of living.  

The HPSI indicators are rather staggering upon assessing consumer sentiment of those 1,000 surveyed Americans, showing that only 24% of Americans feel it's a good time to buy; only 68% of Americans are confident that they'll retain employment; and only 16% of surveyed Americans report that their incomes have significantly increased within the last year.  Tax policy changes has many on edge however, the actual affects are debatable and remain to be seen.    

Such concerns are rather harmonic with ongoing statistical indicators over the last decades related to the decimation of the American Middle-Class, that of which tells the story of honest equity and purchasing power of the average American consumer, this despite recent "recovery" in the economy, housing market, and American consumer resilience.  Market correction had been profound throughout the region post the 2008 "Great Recession" however, renewed housing affordability in the Puget Sound has seemingly disappeared, and rents in many major markets have been documented as exceeding the affordability of the areas typical pay scale.

Consumer Debt- auto loans, credit cards, and student loans- is the highest it's ever been according to Bloomberg.com, and continues to surge according to other sources such as CNN Money and Market Watch. Health care costs continue to soar, one of the largest influence on American credit card debt and bankruptcy.  It is clear that credit has replaced fair wages, and the resulting inflation furthermore perpetuates the problem, a problem that has been swelling for decades.  

REO & Short-Sale influence is mostly a waning issue based on documented NWMLS research however, a notable presence in the sub 10% range continues in many Puget Sound market places, perhaps another indication of a shaky economy.

THE PUGET SOUND MARKET

Despite economic concerns, population growth in the Puget Sound continues to rank among the highest in the nation.  VEROS.com ranks Washington as occupying all of its Top-5 spots of growing markets in the nation.  Several evident factors are influencing such activity, namely employment- Amazon, Microsoft, Boeing, JBLM, Bangor Naval Base, the port of Seattle and Tacoma to name a few- but also lifestyle, climate, natural resources, and recreation are undoubtedly influencing the exponential growth to the PNW.  The result has been consistent double-digit year over price gains with sub 30-day housing inventory in most market places.  Most notably, Seattle population growth continues to outpace the availability of homes leading to major housing inflation and relocation of residences to less expensive surrounding markets of the Puget Sound, such as Pierce county.  

MARKET CONDITIONS CONCLUSION

Credit challenges and subsequent economic conditions appear to be noteworthy concerns within the market place.  An extreme lack of Inventory and low interest rates continue to influence surging prices within the market however, affordability exceeds typical incomes and appears to be influencing consumer sentiment.  REO and Short-Sale homes are still common in many markets despite reduced inventory and market recovery, perhaps indicative of economic conditions.  Rents are experiencing inflation in most areas which appears relative to growth/demand, home purchase-price inflation, and credit challenges.

Economic concerns remain however, population growth to the area appears to be a foreseeable constant which would appear to be the prominent influence- in addition to 'consumer-resilience'- on the competition/prices/demand of homes, this despite those significant economic woes mentioned.     

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