Crazy market.

[aprazer]

The market in my area seems to be escalating at an unbelievable pace. This past year, prices have increased by 25%. In some areas even higher. Three assignments this week have been real eye openers.

Nice neighborhood, guy buys a brick ranch on a 60 X 100, fronts to trafficked road. Pays $625,000. Knocks house down, spends about $500,000 to build new house. Value? about $850,000. Make that "should be". No sales to support anything higher-has offers on the table for $900,000-950,000.

A modest 1,800 square foot ranch on 2 acres. First three comps-gone. All knockdowns. These homes were in good condition, and not what you would typically call knockdowns. Sale prices of the knockdowns are $850,000 to $1,200,000. Price per square foot in this neighborhood is $300 to $600.

A nice waterfront ranch style home, about 45 years old. House is about 3,300 square feet. Renovated at a cost of 1.4 M. Seems high? Value is about 3.5 M. Could sell it in a day. I have seen water front knockdowns recently at 2.5 million+ for 1/2 to 1 acre. Virtually any water front sale is gutted and expanded, typically at a cost of $300 to $400 per square foot.

Even modest homes are escalating at a rapid pace. Recent appraisal on a cape to drop PMI insurance. Guy bought the house 8 months ago. Just looking at the order, I think the value can't have gone up that much in 8 months. Call the borrower and ask if they have done any renovations-nothing major-cosmetic updates. Paid $275,000, current value is $325,000.

I keep thinking how long can this go on? How are first time buyers able to afford anything? And when will we see the market "re-adjust" itself.

 

[Farm Gal]

Bubble, bubble
Appraiser's toil and appraisers trouble!

Understanding not what evil they see,
Reporting same is work for a day!
-------------
I absolutely HATE markets like you describe, have lived in 'em and 'missed the boat' too often! While you are shaking your head and KNOWING that the market simply HAS to crash sometime soon (like yesterday) it just keeps spiraling upwards...

WE report "Just the facts Ma'am, along with a little speculative analysis.

Gets real interesting when you are forecasting off last months's sales to make a stab at present value doesn't it :roll: ...


Wonder if they can EAT those gingerbread houses they put in place of the knockdowns? No I forgot: it won't be the happy homeowner who leaves the keys on the doorstep, twill be thee and meeee who pay for hte next crash... errr did I mention again? :evil:

Sorry for ranting but I will bet dollars to doughnuts it is going to happen in my lifetime, I just HATE dieting.

 

[Austin]

In a market like that, why would anybody need an appraisal? Then too, if there is no pattern or correlation of value factors, it is not possible to perform an appraisal. With prices going up even 8% per year, under these conditions an appraisal is a waste of money.

 

[Claude From NY]

aprazer: Yea it's just nuts, isn't it? I'm in the same area (Long Island) where buyers are falling over each other to offer asking price or higher for properties which were 25% less just 12-18 months ago. I thought that the events of 9/11 would have put a damper on this market, but in fact it's moving faster and stronger. Guess folks are starting to view real estate as the hard asset that it is and are moving funds from stocks and mutual funds into real estate. Low interest rates don't hurt either. But it is a bubble and just like every other bubble market in the past this one will also burst.

Most of the people in this market area (including myself) would not be able to afford their own home if they were looking to buy now. Interesting huh?

 

[Doug Smith SRA]

Aprazer:

Perhaps you have never come across an exceedingly helpful adjustment technique for markets such as you describe. This adjustment was first used in Silicon Valley during the dot com boom. The adjustment technique used in those heady days was simply called "YIPES."

"YIPES" is a relatively new appraisal acronym. YIPES labels the trend where list/sell ratios exceed 100%. The need for such an adjustment reached crisis proportions in Silicon Valley as houses were drastically bid up over listing prices.

The trend and second level acronym (yuppie is already an acronym) is "YIPES" or "Yuppies in Pursuit of Expensive Shelter." Yipes is listed on the URAR sale grid as "List/Sell Ratio " and is an adjustment that is calculated after separating the site cost by matched pairs of non yipes sales and yipes sales. Yipes is expressed as a percentage increase by square foot of GLA.

In a fast moving market, this will enable the appraiser to adjust sales upward for yipes instead of applying a time adjustment. A matched pair analysis must be done to determine if a list/sell ratio adjustment is required for site costs. Site costs are often related to the prestige of employers and in Silicon Valley it was helpful on the comparable map to label each site with the NASDAQ symbol of the buyer.

Good luck in your market. You will soon find you will need the "OH DEAR" coefficient to reconcile falling market prices. "OH DEAR" is short for Overall Housing Disappearing Equity Adjustment Reconciliation.

Regards,

 

[Austin]

Doug: You hit the nail on the head. The problem with YIPES sales is that they are always followed by OH DEAR sales. The way I would handle it is to say that the equilibrium price is $xxxxx but due to excess temporary demand it is $yyy and sooner or later the market always restores equilibrium so if you make the loan based on price $yyy you stand to lose $Y-(X - Z) on the deal. Z being the over supply price. If bank regulators were serious and not owned by the politicians, they would not make loans based on those market conditions. That would stabalize prices in a NY minute.

 

[Judy Whitehead (Florida)]

I am also worried about inflated sales in some areas in my market - especially waterfront. I am a "native" Floridian and have seen that fluctuate drastically. It is possible that all it would take is one big devastating storm. Case in point....house sells for $95,000 (Gulf front) back in the 80's, $287,500 three years ago and $605,000 - yes $605,000 on 4/30/02. My subject was three houses down, larger, brand new, bigger lot.

 

[Austin]

Judy: If people want to engage in that kind of wild speculation with their own money, it is their privilege. But, in my view, to subsidize this kind of activity with regulated funds covered by FDIC is down right immoral. Plus it makes a mockery of the intent of the appraisal objective of protecting the public. How can a rational government nitpick USPAP nuances at the same time this wild speculation is going on? Then too, look at what one storm would do to the insurance industry and resulting insurance rates as a result of these inflated prices. All of this for a place at the beach?

 

[jtrotta]

aprazer

your just getting that kind of action in the market :?: it's been like that here for over 4 years 8O waterfront site, some are 75 x 100 and have been bought for 1.2 mil - take down the old cottage and put up a 3000 SF newbe and the owner won't take less than 3 mil. - the mind bogoling part is, when they get a real contract, for their word of mouth yada yada - they say no, i was just kidding :roll: Most of these players, in my opinion are "old money" & stock market takers -diversifying their $$$.

The yipes and oh dear factor doesn't apply to waterfront junkies; it's the cow people that will use the "oh dear" factor, because they bid the $200,000 - dollar house up to $275,000 and there was no support. And on the Mil + dwellings, they need an appraisal more than the low end buyer, no matter how much loot is being put down.

8)

 

[Chris POklacki]

I dont get it. The original post has a guy spending $1,125,000.00 then sell the house for a loss of $175,000 - $225,000. What is wrong with this guy. most developers are out to make money. One of the active and pricey areas by me the builders are buing homes at $225,000 - $400,000 and selling for $900,000- $2,000,000. They seem to be able to make money.

As far as high sales I think a big part is the appraisers fault. I see many appraisers that dont really know how to determine a true value and simply hit a number no matter what. Lenders are using those appraisers in hopes they dont get reviewed. When they dont, there you have it, a home sold for way too much but the buyer, and in this case the appraiser, doesnt even know it. And it just goes on. I have seen sales that just couldnt have been as high as they were and it was obvious.
Ill let someone else contribute to the maddness. Besides I have seen and heard of appraisers taken to court for inflated values because the owners couldnt sell for anywhere near what they payed and are able to prove they overpayed.
Sorry for rambling. I am dizzy with work now, just typing while taking a break.