Housing Bubble Bursting?

[Steve Owen]

And down it goes!


http://aol.businessweek.com/bwdaily/dnflash/content/oct2006/db20061010_091087.htm

Sadly, many of the general public who commented have a better understanding of this situation than do some appraisers.

Nickname: sw fla
Review: I'm in FL and agree that this market has become way overpriced compared to the income levels of normal working people who live here. Median house price in Sarastota Bradenton is $326,000. Bid up by speculators and people with money coming in from out of state thinking it can only go up up up. Maybe so but ultimately the market forces will prevail. Hurricanes won't stop people from coming but outrageous home prices, insurance & taxes might. On our end, we plan to move to GA where a decent $150k house still exists.
Date reviewed: Oct 18, 2006 2:49 AM

This is almost the exact same argument I made, when arguing about the cost approach with some Californians (and others) who said they could not do it because their area was 100 percent built up. Although I doubt that most areas really are 100 percent built up, yet, the fact is that if those prices become unreasonable, then that area will still have to compete with other areas. What it costs to build a new house is still one of the benchmarks on what the upper limit of reasonable price is.

 

[JSmith43]

What it costs to build a new house is still one of the benchmarks on what the upper limit of reasonable price is.

Random thought.....probably :icon_idea: by most appraisers at some time...

Instead of a silly M & S based back in, when there are plenty of new home comps on the shelf, why aren't they simply gridded out? Use an extra line for physical depreciation, etc, assuming the subject isn't new.

Has anyone seen that type of illustrated cost approach in a residential report?
The WHOLE unit in place Basically, a competing listing grid of new construction alternatives.

 

[Randolph Kinney]

The cost approach is valid even in a built up neighborhood with no new construction. There is even a sample test question for the certified residential exam where they ask you to complete the land value through "extraction" for older properties. For relatively newer properties, the use of "abstraction" where age-life is more accurate. Subdivision properties are typically done this way. I believe it is a fair comparison since it is all derived from the direct sales comparison approach and if your cost data base is reflective of your area.

Where all this cost approach falls apart is if you have a rapidly changing market with volatile price movements, up or down, and the time it really takes to build a new home.

For example, in 2004, KB Homes was building phase 2 in San Marcos and people who bought in January by contract (house not even started) were selling a house that was hot even finished in July for $100,000 more than they paid.

 

[Fred]

The cost approach is valid even in a built up neighborhood with no new construction.

And that is from the guy who says I don't have data to things up.

 

[JSmith43]

I like the part about available new homes substitutes not being hypothetical, therefore there relevance to buyers might not be hypothetical. No need to play guessing games guessing current entrepreneurial profit or lack thereof, that sort of thing.

When the homes are actually available and actually plausible substitutes for a subject, then I think they help set the upper limit of value. After a depreciation guestimate, who knows

 

[Randolph Kinney]

And that is from the guy who says I don't have data to things up.

Yep, you were busted Steven. Shoe fits.

 

[Steve Owen]

Random thought.....probably :icon_idea: by most appraisers at some time...

Instead of a silly M & S based back in, when there are plenty of new home comps on the shelf, why aren't they simply gridded out? Use an extra line for physical depreciation, etc, assuming the subject isn't new.

Has anyone seen that type of illustrated cost approach in a residential report?
The WHOLE unit in place Basically, a competing listing grid of new construction alternatives.

I don't know about others here, Roger, but I always do what it sounds like you're talking about on any appraisal of a new or almost new property. I call it the sales comparison approach.

As for "back in," I suppose that a lot of appraisers do that... personally, I approach M&S from the front. Just like all the other appraisal processes, I never know what the answer is going to be until I have it.

Where all this cost approach falls apart is if you have a rapidly changing market with volatile price movements, up or down, and the time it really takes to build a new home.

The cost approach has a lot of chances to fall apart. This is not the only place it is fallible. (Of course, all the other methods of determing an opinion value are fallible, as well.) My point was simply that if the participants and players in the market (including appraisers) had paid some attention to both cost and income... and not just purchased and valued property on the greater fool theory, then we might not be in the situation we find ourselves in at this point in time.

The problem with rapidly changing markets, with volatile price movements, is that they are more representative of speculative influences than of underlying value of the real estate. I am actually not a great fan of the cost approach; I very rarely give it much weight. BUT, judicious use of both the cost and income approaches in such a speculative market can aid the appraiser in understanding what is happening in that market.

Could appraisers have prevented the rapid run-up and subsequent decline in prices? No. But, appraisers could have been a bellweather to help describe to investors and other market players what was happening... and sadly, they were not.

 

[JSmith43]

I don't know about others here, Roger, but I always do what it sounds like you're talking about on any appraisal of a new or almost new property. I call it the sales comparison approach.

Aren't you supposed to use sales in the sales comparison approach? I'm talking about whole units of new construction, where the offering price is known. Add an attempted measurement of depreciation to adjust difference between subject & new construction alternative & apply a discount for asking price vs selling price, if the market shows the new alternatives sell for 95% of list plus the new car in the garage, for example.

 

[Randolph Kinney]

Latest Core CPI

CPI Fell 0.5%, Core Rose an Expected 0.2%

The consumer price index (CPI-U) fell 0.5% last month due to sharply lower energy prices. The decline outpaced expectations for a 0.3% drop and was the largest m/m decline since last November. The 0.2% rise in prices less food & energy was the third in a row and was as expected.

Core services prices rose 0.3% as shelter prices rose 0.3% (4.2% y/y). The rental equivalence measure of owners' primary residences rose 0.3% (4.0% y/y) for the second month and rents rose 0.4% (3.9% y/y) for the fourth straight month.

The chained CPI, which adjusts for shifts in the mix of consumer purchases, fell 0.3% but less food & energy prices rose 0.3%.

 

[murray stroupe]

NAR president say they want professional service

Thats true and yet this year seems like some real estate agents service has been like oil-gone down, down again.

Dont really blame that recent sellers agent for not disclosing client was in bankruptcy;
no doubt that was RE agents idea to get a pro survey and sellers pay at closing. So some still do it right even in rising forclosures.

[Chart or numerical data , same numbers ,forclosures rising, in many areas]