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Fluid Home Values Particularly Difficult to Pin Down in Today’s Market - 2008-01-13 |
I found out years ago that the most popular of all small talk is about real estate home values. "What's it worth" must be the most often asked question in the world of real estate. And anyone venturing a guess, based on almost any data, or even none at all, is instantly the center of attention in any discussion.
Unfortunately, there is one problem to all this endless speculation. The fact is that one can never know exactly what one's home is worth until it is placed on the market, given a full exposure, and finally, been placed under a negotiated purchase and sales contract by typically motivated parties.
In other words, you can't know what your home is worth until after you sell it.
But if that is the case, then why are we so preoccupied with guessing, and how do the appraisers come up with their prices for fair market value?
Let's take these one at a time.
First, for most of us, our own home is probably our largest single investment. It has served us well for many years not only as a residence, but as a forced savings account.
In addition, depending on how long we have owned and whether or not we have refinanced, it may also be our largest single asset, with an equity we have watched grow steadily year after year.
Because equity is the difference between what is owed on your house and what it is worth, it becomes necessary for us to know those two numbers. A call to the bank will reveal your loan balance, but what it's worth is a mystery.
Thus our proper preoccupation with guessing our home's value. And with home values potentially in flux as never before, we are riveted anytime the subject arises.
Now, as to the second question, we must enter the clandestine world of real estate appraising.
Real Estate appraising is, at the same time, both an art and a science.
The science part measures homes objectively, seeking to quantify the property sold and the sale price. The scientific goal is to find a minimum of three comparable homes which have sold nearby recently, and using that data, apply values to the subject property and arrive at a justifiable estimate of value.
Appraisers are quick to point out that they have a very structured approach to measurement, defining what is and is not a comparable sale, and even what is and is not a square foot of living space.
For example, if any potion of a living level is even slightly under ground level, then that entire level is not considered as "gross living area." Instead, the appraiser must classify that entire level of the home as "basement," regardless of its finish or number of doors or windows.
This objectivity goes to the detail of subtracting or adding value for things as minor as the view, the site, the design of the home, and even the degree of energy efficiency of the home.
All this gathering of facts and measuring of specifics is intended to make the appraiser totally familiar with both the subject property and the comparable sales. And as far as it goes, the process used by appraisers today, does a fairly good job of forcing a reasonable prediction of what a home might sell for if it sold today.
Unfortunately, we need to know that the number the appraiser puts down on the form is only an estimate - a best guess - as to what a typically motivated seller would be willing to accept and what a typically motivated buyer would be willing to pay for the property.
Yes, that's the definition of fair market value. But no, I don't believe that condition exists in many real estate transactions in the metro Atlanta area today.
Instead, I believe that many of those who might otherwise be in the market to buy a home have decided to "sit on the fence" for a few more months, waiting to see what happens with the economy. Certainly, there are plenty of news stories of a pending recession or other economic disaster. That fear alone might be enough to discourage some buyers from making any major purchase.
In other words, why buy now if prices are going to fall dramatically soon?
Is it possible that we are today seeing a concentration in the pool of buyers, skewing it toward purchasers who are not typically motivated, but instead are looking for great buys from desperate sellers who must sell at any price? If that is the case, it would explain a lot.
With current levels of foreclosures, there are many sellers who are highly motivated to sell their homes, if for no other reason than to stop the foreclosure.
I also believe that many current owners, recognizing that there is almost a one year supply of new homes sitting on builders lots waiting for buyers, have decided to wait for better times to sell.
Perhaps appraisers need to take into consideration that when a seller decides to not sell, that action is a value affirmation in and of itself. I know it can't be documented and I know it can't be measured. And that's likely enough reason to not use it.
But the reality is that when a seller rejects a buyers offer, or refuses to sell for any reason at a specific price, that seller has in effect "bought" the property himself, and nobody is taking that affirmative non-activity into consideration when estimating home values today.
My point is this: Until we see a healthy level of sales re-established in the metro home market, we may see an unusual level of volatility in reported home values. That makes the appraisers job particularly difficult, and brings into sharp focus the challenges facing the real estate market today.
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