Prices are rising, but NOT as much as we may think

A bit of color in some charts for your reading pleasure.

This information is from the Ann Arbor Area Board of Realtors MLS run on a monthly basis, and includes all the Ann Arbor school district, single family detached housing only, no new construction or to be built, no condominium units. Data tracks from 1/1/19 forward and it includes several things that we watch as appraisers. Each has a small blurb before the chart.

1st is sales volume on a monthly basis. As expected, the market shows seasonality. Market is typically slowest towards winter and increases in the spring. It is easy to see below, except for the April and May 2020 figures, reflecting the shutdown at the beginning of the pandemic. Interesting, yes?

The next chart is the median sales price monthly. Obviously, there are variances in size, which could affect sales price, and it is addressed as we move through this exercise. The data below shows a gradual rise in price, not a stratospheric rise. For example, January 2019 had 37 sales with the median sales price of $405,000 whereas January 2021 had 47 sales with a median sales price of $368,000 but February 2021 (up to today, 2/26) had a median sales price of $440,000. It is fluctuating.

Monthly median gross living area above grade shows overall pretty level with ebbs and flows, as expected.

Monthly price per square foot does not show much of an increase. This is really interesting.

Monthly median list to sales price ratio showing the negotiated median off the final list price does not show the overheated range we are seeing a lot, with some months seeing upwards of 5% negotiation off final list price, while others exceed 100%. Go figure.

Monthly median days on market were trending upward prior to the pandemic, then many houses were pulled from the market, which is easy to see in March 2020. So far this month the median days on the market have increased to 30, which is interesting based on the lack of supply. My guess is that there is some aspirational pricing going on which causes those houses that are shooting for the stars to sit on the market longer.

Contract to listing ratio is the number of houses that are showing under contract compared to the total number of listings, and although it is showing a sellers’ market in Ann Arbor, is not showing an overwhelming one.

Finally, to really become a geeky data analyst, if you look at the same information on an annualized basis, the market looks like it is increasing at an exponential rate.

January 2020 (1 years’ worth of sales) had a median sales price of $392,000 whereas January 2021 had a median price of $411,000, and so far, this month $415,000. That translates to an increase in median sales price of 5.87% in the past 14.5 months. At the same time however, median size has increased by 2.29%, meaning that increase, which is real, is only 3.58% when factoring the change in size.

All this information is to show that using market trends data published through the MLS may not paint a true picture. If you break it down to even a larger area such as the entire Ann Arbor school district and exclude the new construction (which have the effect of showing an artificial increase), we are increasing, but not the way that we might expect.

Please feel free to share, debate with me, whatever 😊. If you share my information, please just provide reference where the data came from; that of the Ann Arbor Area Board of Realtors, as compiled by Rachel Massey.

Challenging a mortgage appraisal

Challenging the results of the appraisal for mortgage financing

The first thing to remember as a consumer or real estate agent, is that the client is the lender, not the consumer. Even though the consumer may pay for the appraisal, they are no more the client than is the credit reporting agency or title company hired directly by the lender.

The lender obtains the appraisal to ensure that the collateral is adequate for the loan (remember the three C’s of credit, capacity, and collateral). The appraisal is for their benefit, but at the same time, the appraiser needs to complete a fair and supportable valuation. There should never be any bias in favor of any party, or value.

Even though the lender is the client, the borrower is by regulation, required to be given a copy of the appraisal report. When a sale is involved, the valuation may be lower than contracted price. This begs the question, what, if anything, can the consumer do about it?

Lenders offer a formal “Reconsideration of Value” (ROV) process. Most have this process as “one and done” meaning the consumer cannot keep coming back with more data, therefore putting forward the best argument at the outset is imperative.

The steps involved in filing an ROV are to first read the entire appraisal report that was completed and examine the comparable sales as to whether they are ones that the consumer would have considered as reasonable alternatives or not. If there are ones the consumer considers more reasonable, then there are three important points that must be addressed:
1) Are the alternatives more recent to the effective date (not after)?
2) Are they more proximate to the subject?
3) Are they more similar in size, age, style, quality, and appeal?

If those alternate sales do not meet some of these criteria, then they are unlikely to be considered. The appraisal does not choose sales based on price, but on similarity to the subject property (with being proximate and recent important as well). Caveat is that sometimes an older sale that is highly similar will be the best indicator, if the adjustments for changing market conditions are analyzed and made.
Reading the appraisal report will disclose why the sales that were used were chosen, and how they compare.

Another possible reason for an ROV would be incorrect information in the appraisal report. This is particularly likely in the age of Covid-19 when some appraisers are not opening all doors and poking around the property as much as they used to. The half bathroom under the stairwell could be missed in that manner. Perhaps something was missed, and the appraiser could address it, but again reading the report will indicate if it were addressed, simply not included in the sales comparison grid that is the focus for most disputes.

If there is adequate information to move forward with the dispute, do not contact the appraiser. Remember the appraiser’s client is the lender, not the consumer or the real estate agent. Contact the loan officer for assistance in submitting an ROV, but remember these processes are mostly one-and-done, therefore be rational and compelling in that first submission.
• Explain how each sale that should be considered is in some way better than the ones in the report
• Limit the number of sales to three if possible
• Do not be confrontational
• Address any inaccuracies noted and support for that position

Most appraisers will respond to the ROV as a normal part of their business. Some will refuse to consider what was offered, but that is rare. Chances are the sales offered were already considered but not included, and the appraiser will respond as to why not, but sometimes a good valid sale is missed, simply because the geotagging or MLS area number were incorrectly inputted on the listing, and it did not show on the appraisers search. Sometimes there are sales that were showing as under contract as of the effective date of the appraisal that had closed. Sometimes errors occur since humans are human. Sometimes a value dispute will result in the appraised value increasing, sometimes it will result in no change, sometimes it will result in the value decreasing.

Do not assume the appraiser will refuse to look at the request. Put your best foot forward by providing solid data for consideration in a professional manner. If the value remains the same, then it is time to renegotiate or move on. Remember the appraisal is for the benefit of the lender to ensure there is adequate collateral for the property they are lending on.

Two years of Ann Arbor market stats

We are so often bullish about our market, but is it as “hot” as news outlets like to believe?

We certainly have a shortage of inventory, which does create pressure on acting quickly and agressively on well priced houses that are in “show-ready” condition. That does not mean that prices are rising exponentially, or even that much at all?

Simple example is taking all sales of single-family houses that are already built, not new construction or “to be built”, and arrying on a monthly basis. This sample below includes everything in the entire Ann Arbor school district exposed through the local MLS, one month at a time. The prices and price per sqft are shown based on the medians. Each month has between 50 sales and 128 sales, which is sufficent for trending.


Ann Arbor is the test market, because it is the main market with the greatest number of sales within the Washtenaw County real estate market. Data above does indicate a slightly increasing median price over time, but a slightly declining price per square foot. This equates to stable, to a slight increase, not substantial. In fact, if you take July 2018 and compare it with July 2019 and July 2020, the median prices are not that dissimilar.

July 2018 had 127 sales with median price of $399,900 and median size 1,796 sqft
July 2019 had 121 sales with median price of $392,000 and median size 1,839 sqft
July 2020 had 128 sales with median price of $403,450 and median size 1,856 sqft

Comparing those same periods means that the current median price is 0.89% higher than the same time two years ago, while at the same time 3.34% larger median size. Not an increase.
The same period 2019 to 2020 shows a larger increase of 2.92% and 0.92% increase in size. Did prices drop in 2019?

Obviously, it is important to compare a longer period and look at monthly changes. It is equally important to compare the competitive market segment for any property, as not all submarkets increase or decline at the same rate. It is possible that the higher priced houses in the market are not selling well, with the lower prices gaining market share and increasing at a higher rate. Or it could be the opposite, or any number of reasons.

Above are two years’ worth of sales on a monthly basis, showing three measures; 1) number of sales, which shows how cyclical the market locally is; 2) median price over time, and 3) median price per square foot. There are other ways of looking at the market, including days on the market for the sales, list to sales price ratios, inventory levels, among others.

Markets can also change rapidly. If inventory increases, supply and demand can change. If interest rates rise, affordability drops, and prices could follow. If unemployment does not improve, fewer buyers can purchase, increasing inventory and affecting prices. If evictions increase, tenant occupied housing may become available for sale, affecting inventory levels. If mortgage forbearance is not properly handled, homeowners who obtained it could find difficulty in continuing in their present arrangements and may have to list their homes, changing inventory levels. If the virus increases in the Fall, as has been suggested, there could be more layoffs and more people thrown into circumstances that would cause them to sell. There is a myriad of issues that could change the market, but as of this writing, it looks stable to slightly increasing, and going through the normal seasonal cycles.

Uncertain future, forgetting the past

Our collective memories tend to be short. Maybe it is human nature? I cannot even pretend to understand why we forget the past or how it may predict the future.

Not that long ago, the United States in general experienced a significant decline in property sales prices due to the Great Recession and the mortgage market fallout. Ann Arbor, the general community I have called my home for over 55-years, was not immune to the fallout. Ann Arbor is somewhat insulated from national market forces in that we are a university community, and the university brings with it a lot of stability due to student life, research and development, and the industries that tie in to the university. That said, we are not immune.

In June 2019 I wrote a piece about Ann Arbor for Mobility Magazine. In it I included a year over year chart of all sales through the local MLS back to 2005. This information clearly shows a declining trend from the 2005 data down to a low point between 2009 and 2011. Price increases both with single-family houses and condominium units started in 2012 in earnest. As of a 4/9/20 data run, there are signs of a leveling of prices as a whole, and a minuscule decline in prices with condominium units.


Year to year trends. Houses in blue, condominium units in orange, new construction included

With the World Health Organization officially announcing on 3/11/20 that the Coronavirus was a pandemic, our world started to change. On 3/23/20, Governor Gretchen Whitmer announced a “stay at home” order affecting all non-essential businesses, which included real estate showings. On this date, our world changed even further.

Buyers, sellers, and the Realtors who work with them are adaptable, and some transactions have continued via virtual showings. Many agents have noted that their buyers are reticent to purchase in this manner. This is logical, as anyone who reviews MLS photos will realize photos are often not truly representative of a properties condition due to enhanced photography, and the allowance (in our MLS at least) of virtual staging. Photographs of detrimental conditions are not usually front and center. Therefore, although there is still activity with some buyers and sellers who need to move, for the moment we are largely on hold.

Where will prices go when the stay at home orders are lifted? To me it is anyone’s guess, although there are factors that we should consider. One factor to consider is that prices show as already flattening by the 4/9/20 data run (not the same period as previously, but only two months and a couple days off, still containing one years’ worth of sales). For example, for all Ann Arbor sales, the median price increase was only $3,000 from $390,000 to $393,000, and condominium units saw a very small decline from $238,000 to $233,000 in this same period. If prices had already started to level even with an extreme shortage of inventory, what will happen when the market unfreezes and buyers and sellers are free to move around again? What happens if the unemployment rate tops 30%? What happens if it only tops 15%? Will interest rates be reduced even further to spur activity? What about property taxes and their effect on affordability? Will buyers reduce their price range so as to be better able to withstand future catastrophes? Will the stock market continue to be mercurial and buyers feel more comfortable having assets in something solid, like real property?

Agents in my market are largely optimistic. The very tight supply compared to heavy demand over the past few years had driven prices higher, but being a numbers person, it does not show in the data that I ran through the MLS as noted above. Granted, the data that I culled from the market included all sales within the district, and different markets within the wider school district have moved at different levels, but overall, this is meaningful information.

Optimism is a good thing; it beats being Eeyore. That said, our market is not immune to declines in pricing, as evidenced by the simple chart shown above.

My crystal ball is broken and I cannot predict the future. If I could, I wouldn’t be writing this particular blog post. The idea however, is we should examine different forces within the market and not only focus on positives or negatives, but take a more balanced approach. As appraisers, we let the market tell us what is happening, and just over two weeks into our States shutdown, it is simply too early to call.

Stay well my friends. Take care of your health, stay home and save lives. Collectively we will come through this, we simply cannot predict where prices will be when it is done. At least I cannot.

Continued inventory shortage

Washtenaw County, like much of the nation, has a continued inventory shortage. This shortage is heavily concentrated in the starter market.

Comparing the same period last year to this, the number of sales and listings have dropped across the board. At this time last year, 3,609 single family houses had changed hands through the MLS in a one-year period. Today the same parameters show 2,586 sales, or a decrease of over 28% in volume. Last year at this time, throughout the County, there were 483 available listings, but today there are only 288.

The inventory shortage continues to be concentrated in the starter market. New construction is simply not meeting the needs of the more modest market, while there is an abundance of properties available over $500,000. As of this morning, if a buyer can only afford $200,000 in the Ann Arbor school district, there is one available listing (single family houses, not condominium units). Increasing the price to $300,000 reveals only nine additional offerings. Across the board for all of the school districts in Washtenaw County, there are still only 77 available listings not shown to be under contract, compared to 1,172 sales in the previous year listed up to $300,000. This means there is less than one month’s inventory across the entire Washtenaw County board. That is a shortage.

For comparison, sales within the same market area listed from $500,000 to $600,000 that sold in the past 12-months totaled 178 sales. As of this morning, there are 27 active listings available, or 1.82 months’ supply compared to 0.79 months for $300,000 and under. There are nine contracted listings in the price range, or 25% absorption, and $300,000 and below there are 93 compared to 77 available, or 54.71% of those properties under contract.

Although we expect there to be a lot of price pressure in the starter market due to lack of inventory, prices may not necessarily increase/decrease in the manner expected. For example, taking sales in Saline (excluding new construction) and segmenting built from 2000 forward but arranging in three size ranges, all houses on less than an acre, it is easy to track trends over a year. This starts with 1,400-2,000 sqft, then uses 2,001 to 2,500 sqft, and finally from 2,501 to 3,500 sqft. It could be expanded, but it is to show how the market is segmented in direction of where the sales fall.

This segmentation based on size is a good visual on how the market in general is behaving. Basically, it shows the starter market trending upward on a linear trendline, stable for the mid-sized houses, and declining for the larger houses. Using a third order polynomial trend shows a dip recently for all of these segments, however it may be due to the time of year more than changes in the market, therefore only the linear is represented above.

The importance of drilling deeper than broad statistics

The market statistics we get from the Board of Realtors is broad. It encompasses all properties, not segmented by school district or area, size, or any other factor. The December figures that came out a couple of days ago indicate a 7.3% increase in sales price, but if you do compare to the school district, it is not the same (also one month as opposed to one year). Point is that statistics depend on what is analyzed.

Below is a direct comparison of all sales in the Ann Arbor school district excluding new construction and “to be built”. This information comes from data found in the Ann Arbor Area Board of Realtors MLS and is something you too can pull for your analysis.

(sorry, you have to click the image to enlarge)

• Number of sales declined 1.4%
• Average price increase 4.37% but size declined 0.15%
• Median price increase 3.19% with size increasing 1.55%
• Average price per sqft increased 4.53%
• Median price per sqft increased 1.61%

Inflation rate noted currently at 1.76% between 2019 and 2020. This means that the rate of increase for average price is 2.61% and median 1.43%. If you consider price per square foot, it is similar on the average and a negative number on the median.

This information takes into account all listed houses in the Ann Arbor school district other than “to be built” and new construction. It does not segment by starter market, size, or another variable. Once that is done, data can change dramatically.

For example, if houses are segmented by size and age, differences appear in price changes. For that reason, it is a good idea to not hang your hat on an overall market change, but to consider other factors in whether the market segment in which the property is situated is changing.

I broke out the same information between houses up to 1999 sqft, between 2000 and 2999 sqft, and at and above 3000 sqft built between 1970 and 2000 in the Ann Arbor school district. This is still wide and takes all of these sales into account, but the differences where the market is most active is notable, and there is a difference between median prices and average prices. Choose one and stick with it. For the data trends I run, I stay with median because it takes care of the outliers.

Activity:
• 1999 sqft and below increase in sales 9.68%
• 2000-2999 increase in sales 1.27%
• 3000 and above level from one year to the next

Average price:
• 1999 sqft and below increase 11.50%
• 2000-2999 sqft increase 5.21%
• 3000 sqft and above increase 2.53%

Median price:
• 1999 sqft and below 3.30%
• 2000-2999 sqft increase 4.36%
• 3000 sqft and above increase 6.59%

What happens if the market segment is addressed; say all houses between 2000 and 2999 sqft in area 85, built between 1990 – 2005 (a building boom in that area around that time). A trend line is measured both on the linear and 3rd order polynomial and what it shows is a slight increase in prices over the past few months, and a decline in price per square foot (price increase affected by size increase).

All of this information is the type of analysis appraisers use in trying to measure the market in which the property they are appraising is situated. If an appraisal suggests the market is declining, or increasing (or stable) then the appraiser has gone through some level of analysis to determine what is happening both for the wider market, as well as the segment where the property is competing.

Appraisers analyze the market. They analyze not only the wider market, but the market which is competitive with the subject property. When you are considering hiring someone to handle your valuation needs, interview, and hire someone who will make sense of the complicated market they are working within.

What is a comparable sale?

What is a comparable sale?

A sales package left for the appraiser is welcome. Most appraisers appreciate the agent’s insights into the sales they used as comparable choices when they priced the home for sale. This is particularly the case if the agent had some knowledge of pet odors or peculiarities with one of the sales that looked like an obvious choice. Occasionally now, with photography, the sale presented itself in much better light than it actually was in reality. The MLS is after all, part sales tool. This is one reason you will get calls, emails and texts from appraisers asking about a property that you sold, as photos do not always tell the truth. So, please provide your insights related to the sales you considered in arriving at the marketing price.

There have been a few instances lately however, that made me think it is a good idea to revisit what a comparable sale is from an appraisal perspective. First, we do not search by price. While buyers do use a price range in their search, appraisers cannot do that, or they end up appraising to a predetermined value to a large extent. Instead, we are looking for comparable attributes.

Examples that have been included in agent packages recently include:

• Subject property was a subdivision house that was not a common model for that subdivision, but there was one sale of the same model. Package included two sales that were on 2-4 acres about 5 miles from the subdivision. There were at least five sales within the subdivision that were reasonably similar to the subject that had occurred within the past six months. The model match was not in the package and only the highest sales in the subdivision were included.
• Condominium unit that had ample model matches, but all the recent model matches were lower sales prices than the ones that occurred between 9-12 months prior. Guess which ones were in the package?

Most people will want to buy as much as they can for as little as possible. If you have a budget for a new car of $25,000, it is unlikely you would be looking at BMW’s or Mercedes, whereas if you have a budget of $60,000 and want a German car, you are unlikely to be looking at VW Bugs. Is the VW Bug comparable with a BMW 5-Series? Not likely. Are they both German Cars? Of course. Would the buyer of a Bug choose a 5-Series if they were the same price? Most likely. Would the buyer of the 5-Series buy the Bug if they were the same price? Highly unlikely. You get the picture.

This is the same idea with comparable properties. A comparable property is one that is a substitute for another property. It is uncommon to have properties that are directly comparable since every house has something unique about it.

What does this mean when you provide sales to an appraiser? First, look for what the typical buyer for your property would truly look at as a substitution. When you do that, look at those sales in the same vein. Would the buyer of that sale look at your property as a reasonable substitution? Sometimes there is nothing even approaching comparable to your property. In this instance, look to what else has sold that has some element of similarity, such as location, or quality and size, and then try to find something that is obviously not as good as your property as well as something that is better. In that manner, at least you will know that the property should be worth more than one house and less than another. Appraisers will do this on those unique circumstances when there is truly no comparable property to choose from. The appraiser will look to what they think are logical potential alternatives, even if they appear dissimilar.

Remember, the appraiser is going to choose the sales they consider most comparable, but the package you provide can be extremely useful, and you may have information about possible comparable properties that does not show on the MLS. Expect the appraiser will independently verify that information, but give them something to start with. Our MLS lacks a scratch and sniff function, and there is some virtual staging that occurs at times in listings, so give us the information you have that is relevant.

Why price per square foot is not the appraisers choice

Often, buyers and sellers are under the impression that it is simple to price a house by its square footage. Nothing is further from the truth, unless of course, all the comparable properties considered are within a couple square feet of each other and have the same quality and condition and are in the same immediate neighborhood with no variation in the value of the site.

Underneath all is the land. This means that a house that sits on a hypothetical 60×120 sqft site should have the same underlying value if the house were 1,000 sqft or 2,000 sqft. If land is selling for $50,000 for this 7,200 sqft lot, then the value of the land does not change in value because it has a larger or a smaller house on it.

Take this following visual for example, it includes median sales prices over time for all sales in an area, as well as median sales prices over time for houses that are between 800-1200 sqft. Notice how the smaller houses measured with the moving average trend line, are sold for quite a bit less than those that encompass the entire market (in this case, a school district). The median size for the houses within the school district as a whole in this sample, were largely between 2,050 and 2,250 sqft. The median size of the smaller houses was largely between 950-1050 sqft. Therefore, the median price would be expected to be half for the smaller houses than the market as a whole, but that is not the case. The median price of the larger market sales was around $360,000, while the smaller houses was around $225,000, or 37% less, not 50% less.

Take the same information looking at price per square foot, and the scenario is now flipped on its head. The blue moving average line is that of price per square foot, which favors the smaller houses, running around $225 per sqft on average while the wider market was showing around $170 per square foot, or around 24% less per square foot.

Another way to look at this is, what is the value of a Tesla per pound? What is the value of a Yugo per pound? Obviously, they are not the same. This is the same idea behind price per square foot for real property valuations. If you have questions about how an appraiser values a property, please reach out to your local appraisal expert and ask questions. Better yet, if you need to know the value of a property, engage a professional to help answer your questions.

Hopefully this helps clear up why it is that appraisers do not simply use the price per square foot method in determining the value of a property.

Probate – proceed with caution

Probate can be a complicated process for the personal representative, who likely only handles this type of situation once or twice in a lifetime. For some people, such as the attorney, or the agent who handles many estate related sales, the process makes sense. To the individual tasked with being the representative however, they likely only have a cursory understanding of the process. A proper assessment of the value of the decedent’s real property is particularly difficult for the layperson anyone who is unfamiliar with real estate transactions.

When determining date of death values for the decedent’s assets, the temptation may be to use assessment data in order to arrive at the opinion of value as of the date of death, but is this working in anyone’s best interest? Is the assessment data a good indicator of value? Does having a value that is substantially higher or lower than actual value hurt those involved?
In order to determine whether or not these sources are reliable, I pulled twenty random sales in the area, and compared their sales prices to the assessment data. The TCV is the True Cash Value.

This random sampling of twenty sales that occurred in the area, compared to assessment data, shows assessment information both above and below sales price, and only two instances within a five percent variance (which is the variance that most appraisers consider the tolerance they look for in terms of acceptability). That means that assessment data would only have been useful ten percent of the time, depending on what was considered an acceptable variance.

The most reliable and defensible number will come from a formal appraisal, conducted by a certified real estate appraiser. Throughout the valuation process, the appraiser analyzes and reconciles the collected data to arrive at conclusions regarding the final value opinion. In the final reconciliation, the appraiser considers all the available data and uses knowledge, experience and professional judgment to arrive at a final opinion for the property.

The cost of an appraisal is minimal compared to the potential tax burden of an inappropriately provided basis. Equally important, a report of this caliber may help substantiate your claim that the values within the report are well-founded and accurate.

April 1, 2019 Washtenaw County market snapshot

4/1/19

Mixing up my monthly run related to how the market is doing (not looking at prices, only supply and absorption).

The current monthly stats, run today, show most markets with limited inventory compared to the past 12-months sales, with only Dexter and Saline running over three months’ worth of inventory. Both of these markets have an abundance of new construction and that is considered to be partly to blame for the higher supply levels. Since I started running the information including “to be built” properties months ago, I have decided to keep running this particular data in the same manner for consistencies sake.

Below is a snapshot of how this Washtenaw County market looks right now, with a shortage particularly in Whitmore Lake, Milan, Lincoln and Ypsilanti, and very high absorption (firmly in a seller’s market) for Chelsea, Whitmore Lake, Lincoln, Milan, Ypsilanti and Ann Arbor.

The next image is that of comparison of month to month, color coded to show where activity has been since I started tracking this on 9/1/18. Green is go, meaning seller’s market. Orange is slowing down, in a buyer’s market, and yellow is in between, what I would consider “balanced”. Looking at this color chart, it looks like spring is shaping up to be very active again, but as we tip towards more inventory, could reverse, such as what is currently seen in Dexter.

Of course, within each of these areas there are market segments, and the information provided only shows the entire school district sales and listing activity, for residential single-unit properties. I could run this on condominiums and in market segments as well, but since what I am looking for on a monthly basis, is the broader overview, this works well for me, and I hope for you.

Hope you all find this useful, and remember, if you have any appraisal referrals for people who need a valuation for estate, probate, divorce, asset division, relocation, cash sale, or any other reason that is outside of mortgage lending, please think of me.

Happy Spring!