What is REAL in Real Estate

The past few months I have had to explain over and over and over again some of the misconceptions in our market, true valuation models of properties and the basics of buying and selling. In this blog I want to cover a few of the most common.

Misconception 1: Happy Valley Real Estate is still appreciating at 10.3% per year!!!!

RMLS puts out these numbers, and in my opinion, artificially inflates consumer sentiment. Many people use the median price point to determine "appreciation", including RMLS. Median price point is nothing more than a statistical line depicting the midpoint of value between which homes have sold over a set period of time. You can have a declining median price point and rising values, or rising median price point and declining values. As the two are not necessarily connected. The median has NOTHING to do with appreciation. Appreciation (or depreciation) is the actual change in value of an asset over time. Looking deeper into Happy Valley transactions I am seeing a RETREAT in values to 2005 values. In fact, I found MULTIPLE properties that have sold, or are sale pending in the last 30 days below their previous sale prices in 2005 ands 2006. Additionally, Craig's List is full of desperate Sellers trying to get out from under homes purchased in the last three years, many have already pre-negotiated short-sales with their lenders.

Truth 1: Happy Valley home prices are at best flat, most likely retreating.


Misconception 2: My home was appraised at $650,000, so it must be worth $650,000!!!!

Any asset is worth what another party is willing to pay for it. I don't care if the Pope himself says your house is worth $650,000, if you cannot find a willing party to pay that much, then it is not worth that much. "Value" and "market price" are not always the same thing. We may be able to do a cost approach to determine the value at $650,000 (lot, building, landscaping, upgrades). But, if the current market is not willing and/or able to pay that price, then its market price becomes lower than its appraised value.

Truth 2: Appraised value and market price are no longer the same thing.


Misconception 3: My neighbor just sold for $650,000, so my comparable home will net me $650,000.

Currently sales prices are inflated in multiple ways that are often difficult for the average person to discern. That $650,000 sales price may have been inflated by; Seller contribution to closing costs/pre-paids (often as high as 6%), pre-closing repairs / upgrades totalling tens of thousands of dollars and the inclusion of personal assets such appliances, play structures and even vehicles/RVs/boats. That $650,000 price may have included $40,000 in Seller give aways - net price actually $610,000. From this net sales price Realtor fees, Escrow costs and settlement charges must then be deducted.

Truth 3: Sales price grossly overstates Seller net proceeds.


Misconception 4: The market slowdown is just a bump in the road and we will be back to "normal" soon.

I always answer this one with a question: With your income and credit could you afford to buy your house at what you THINK it is worth? Almost 100% of the time the answer is NO! Then, I ask, who can? The pyramid is starting to crumble, and the removal of the base will reset values backward a few years.

Truth 4: This is not a bump, but a fundamental shift to a more conservative and responsible housing market.


Summary:

There were multiple changes in the real estate market that fundamentally changed value models during the early 2000's. This last year has seen the brakes applied to many of them.

1) Cheap easy credit. Not only were rates LOW, but lending standards were very lax. Rates are up steeply from 04/05 lows and Creditors are dramatically tightening standards, reducing the number of people who qualify. This means there are FEWER qualified Buyers who can afford LESS than before.

2) Speculation. Speculators helped bid up homes, particularly new construction. Those Speculators are no longer Buyers, but now desperate Sellers!

3) Market Exhaustion. So many new Buyers got into the market, and existing Buyers moved up, that we have naturally arrived at a point of respite where people are likely to sit tight for a period of time. A mid-income family who lives in a $400,000 home with a $300,000 mortgage at 5% fixed with a payment of $1,611 would not want to get rid of that mortgage to buy a $500,00 home with a $400,000 mortgage at $6.75% fixed with a payment of $2,595

4) Builder desperation. Yes, Builders horribly misjudged the demand in Happy Valley and overbuilt in the $500,000+ range. One is holding a fire-sale for their remaining 70 properties. Huge price reductions and Seller concessions are being offered as the norm.

5) Consumer sentiment. When all the news was "rosy" Buyers felt that the had to jump quickly before a house was snatched by another Buyer or the price went up another 10%. Now that the news has turned "apocalyptic" Buyers are viewing dozens of homes and negotiating every concession they can.

What can you do in this tough market?

1) Engage an experienced professional who can best market and show your home and negotiate on your behalf during a transaction.
2) Price your house correctly.
3) Make your house easy to see, and remove barriers to an offer.
4) Present yourself as a "qualified Seller", not a desperate Seller.
5) Be patient.

As always your comments on this blog are appreciated.