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Ann Arbor housing market as of 12/16/13

Pulse of the market as of 12/16/13

What is happening in the general Ann Arbor school district market? Below is a brief analysis of sales exposed through the Ann Arbor Area Board of Realtors MLS (A2BR for short), excluding any distress sales and excluding listings offered in Realcomp and the Great Lakes Repository. These are excluded because the other MLS tend to create a lot of duplicates and that skews the data, and also excluding distress sales compares apples to apples as far as pricing/activity statistics.

In each segment one years’ worth of data is included at a time. This is done so as to avoid seasonal changes as it is typical to slow-down during the winter months and increase in number of sales and prices in the peak spring and summer selling seasons.

A brief analysis of each of these charts is noted below.

Number of sales – in the year 2011 the exposure of arm’s length sales through the A2BR was 805, and by 12/1/13 had climbed to 1,067 sales. This is an increase of 32.55% in number of sales from 1/1/12 to the most recent period in 2013.

The increasing number of sales indicates market optimism as more sellers are able to market and sell their properties and more buyers move into the market.

List price to sales price ratio – this is a good measure related to the degree of negotiating that occurs in the market over time. For the last three periods, the median sales price has exceeded the median list price slightly. In most of 2012 the sales price to list price ratio was in the 95.11% – 96.58% range, increasing to 96.23% to 100.72% in 2013 with the period from 10/1/13 to present showing slightly over 100% for the median sales price over list price. This provides an indication of less negotiation that is occurring in the market at present compared to recent historic data.

Median Sales Price – relates specifically to the median sales price regardless of differences in size. Since there have been a large number of sales in this dataset, and no distress sales are included, the price increases appear to be mainly due to improving market conditions. A drop in median prices did occur from the beginning of the study up through mid-2012, but then a steady increase in prices is noted after 4/1/13. Comparing 1/1/13 data with a median price of $258,000 to 12/1/13 at $286,000 means that the non-distress sales, as a whole, have risen 10.85%.

What about the change on price per square foot? What happens if median size increases or declines; does that affect the change in median price? Typically as size decreases, price per square foot increases for a property. The reason is that there is the underlying land value to a property, as well as the economy of scale of building a larger house. It is conceivable that a change in the median price can be tied to changes in size. As such, it is important to also look at the changing price per square foot. In this dataset prices show as almost steadily increasing, even during the period that the median price slipped somewhat. This is due to a decline in size on the median from 1,944 to 1,842 (5.25% smaller), which would logically equate to a drop in the median sales price.

From January 2013 to December 2013 the median price per square foot has increased from $141.60 to $152.13 or 7.44% compared to 10.85% if looking at median prices without regard to changing size.

In addition to this information, what is currently on the market and currently under contract also plays a role in the tone of the market. As of 12/16/13 there were a total of 292 houses on the market in the Ann Arbor school district, as described above. Of these, 99 were under contract. That contract-to-listing ratio is 32.90% which is a moving number that changes every day depending on how many houses go to contract, close, or deals fall through. The current contract-to-listing ratio is significantly lower than in the summer months but is still fairly active, indicating there is still good demand. In addition, this data also suggests that there are 193 active listings that are not under contract, and with the most recent period showing 1,067 sales in a year (88.92 per month) indicates that there is just over a two month supply of active listings based on the most recent sales data.

This data relates to all of the Ann Arbor school district, and each submarket within the area could be different with some increasing in price at a greater rate while others remain stagnant, or possibly even declining in price.

Markets are also subject to change quite rapidly, and the data above is a snapshot of the market in time. Interest rate volatility; increased supply; change of jobs forecasting, etc. can all play into a rapidly changing real estate market. As such, my recommendation is always to use a local appraiser who knows the market well and is able to analyze the market whenever you have any valuation needs.

If you have any questions, please feel free to comment on my blog or send me a message. I will do my best to answer whatever questions you may have.

Ann Arbor rentals part two – or why rent when you can buy?

(continued from previous post)

Why rent when you can buy?

Often the lack of a down payment, or a down payment that is small, compels the need for Private Mortgage Insurance. Sometimes it is the need for flexibility such as the ability to move and not be locked into a mortgage. There are a myriad of reasons not to buy, not the least of which is lack of money for the down payment and for ongoing property maintenance. With the upcoming changes in the mortgage market, financing a house/condo is likely to become more difficult and this upcoming change may also be spurring an interest in investment properties as addressed in the previous blog post.

In the previous post I addressed a $139,000 condo purchase. For a buyer with a 10% down payment and a 4.5% interest rate on a $125,100 mortgage for a payment of ~ $519, plus PMI of around $100 and taxes and condo fees of $580 combined for a payment that is almost equal to the landlord; but with benefits as well as risks.

The benefits include the mortgage interest deduction and being locked in to a payment that will only go up relative to condo fee and taxes. An intrinsic benefit is also that of being able to remodel, and even rent if the need arises. Pitfalls could include a market that declines in value, wiping out the small amount of equity; or like with the landlord scenario, too many rental properties in the project. Association fees could rise to a level where they are no longer affordable, and the owner is locked into a payment that may become too difficult to manage. Capital expenditures such as the need for exterior maintenance (roofs, siding, street paving, etc.) could come in the form of a high special assessment, further reducing the affordability. By renting, the tenant has the flexibility of simply picking up and moving if the financial burden is too great whereas the owner does not have that same flexibility.

A concern from the standpoint of the appraiser is that the market may be starting to repeat itself. The run-up in the market in 2002-2005 seems to have been driven largely by speculation in real estate, and therefore this increased push to buying properties as rentals is reminiscent of the prior run-up, and the fact that in 2013 over 32% of MLS sales in an area were purchased for rental purposes, gives me pause to wonder if we are taking that same direction again. This brings me to a future blog post: is history starting to repeat itself?

Ann Arbor – 2013 Rental purchases

Why so many rentals in Ann Arbor?

It was time to gather a bunch of rental data together in order to be able to handle more rental property appraisals when the time comes. I was expecting that I’d find 20 or so houses/condos that had been purchased as rental properties in Ann Arbor, but to my great surprise, I located at least 49 condos and 17 houses, all purchased to be income producing properties within the past year! This represents only those transactions that were completed through the multiple listing service, indicating there are likely quite a few more. In one area alone, 32% of the sales were sold to would be investor owners.

What does this mean? It means that buyers are optimistic about the ability to buy a property, and rent it for a profit. They are optimistic that when they do eventually sell, they will sell for a profit.

What makes these buyers so optimistic? Is it the belief that the market is going to continue to increase at the current rate, or that there are going to be more and more renters in the market?

My thoughts on the increasing number of purchases as rentals is that mortgage interest rates are still low, even on income producing properties; that the buyers of these properties are expecting to rent for a few years and then sell at a profit when the market has reached a point where they see another peak; that the income is high enough to carry the mortgage, insurance, vacancy and reserves; and there is the expectation that there will continue to be a number of quality tenants available.

Think about this – once interest rates start to increase (and they will), affordability will decline unless prices decline as well. There are costs of home ownership over and above the mortgage and tax payment. There is general maintenance and upkeep as well as significant improvements such as replacing cosmetic items and mechanical/structural components. Home ownership, although attractive, is not for everyone. It is not attractive to people who plan on staying in an area a short time as they would essentially be playing the market if they bought and needed to sell in a couple of years. The downturn that was experienced in the Ann Arbor market from 2005 through 2010 is a good example of why a short term stay may make a purchase inadvisable.

Take for example a $139,000 condo that currently rents for $1,500 per month (real example from the search results). If the buyer bought the condominium with a 25% down payment, they started with around a $104,500 mortgage, and if the rate of interest is 5.5% (1% over owner-occupied rates) they have a mortgage payment of around $590 per month. Add in the condo fee of $275 per month, and taxes of $305 per month and the entire payment is $1,170 meaning they are clearing $330 per month that can be set aside for repairs, improvements and vacancy loss. They are locked in to this nice low rate and have a property that is easy to maintain and pays for itself after the cost of the down payment and closing costs. In ten years, their mortgage balance should be down to around $86,000 all the while having someone else pay the mortgage. Even if that owner sold at a level price they would have recouped their initial investment of around $40,000 and had cash coming in on a monthly basis, plus realized the benefit of a tax write off.

At this price, and at this rental rate, the purchase makes sense to some investors even if the market stays level.

There are pitfalls to this purchase though: the market could decline, leaving the owner in a negative equity position; the condo association could become insolvent, leaving the owner with a larger association fee than previously expected; tenants could refuse to pay rent and drag out the eviction process and destroy the property in the interim; the condo complex could become heavily investor driven, losing some financing options which could easily affect the resale value of the property, etc.

(to be continued on next blog post)