10 Things That Don’t Affect Home Value

I love this.  Glenn Bradley wrote this post on his blog, Ask Glenn Bradley, called The Nine Things That Don’t Affect Home Value:

Here are nine items that do NOT affect the market value of a home:

  1. the original purchase price
  2. the amount owed on the mortgage or home equity loan on the property
  3. the list price of other properties for sale in the neighborhood
  4. what the seller thinks it’s worth
  5. the amount of profit the seller needs from the sale
  6. the selling prices of homes in prior years
  7. an appraisal
  8. tax assessment value
  9. the position of the stars and moon

I’ll add one more:

10.   The price a similar house around the corner sold for two years ago.

The sole determinant of the value of a home for sale is the price someone is willing to pay for it.

Senator Dodd Urges Action on Commercial Real Estate

By Kevin Drawbaugh and Corbett B. Daly
http://www.reuters.com/article/idUSN2220875620100222

WASHINGTON, Feb 22 (Reuters) – U.S. Senate Banking Committee Chairman Christopher Dodd, citing concerns about the outlook for commercial real estate, asked regulators on Monday for action and a report on efforts to stabilize the sector.

“The weakness in the (commercial real estate) market requires prompt and robust responses from the regulators to guard against harmful effects on financial institutions and the economy,” Dodd said in a statement.

“I urge you to redouble your efforts to provide appropriate oversight of this vital component of our economy,” he said.

Dodd asked regulators for an update on their work to stabilize the market. The letter went to Federal Reserve Chairman Ben Bernanke and other top regulators.

This month, a congressional watchdog panel said the commercial real estate market has fallen more than 40 percent from early 2007 and a wave of loan failures in the next few years could threaten the U.S. economy just as it struggles back to its feet from the worst recession in 70 years.

Dodd noted that a Fed official testified last month before the watchdog panel that examiners at the U.S. central bank are reporting a “sharp deterioration” in commercial real estate loan quality.

The letter comes amid a broader debate on Capitol Hill over rewriting the way the U.S. financial services industry is regulated in the wake of the financial crisis.

The Obama administration is urging lawmakers to support a U.S. financial consumer watchdog that is strong and independent, pushing Senate Democrats to resist compromises sought by Republicans and bank lobbyists.

Treasury Secretary Timothy Geithner said the administration is still fighting “to consolidate the fragmented authority of seven separate agencies into a single, independent and accountable Consumer Financial Protection Agency (CFPA).

Seeking compromise, Dodd in recent weeks has discussed multiple options with Republicans, who oppose the CFPA, but has not struck a deal.

The Connecticut Democrat is working closely with Tennessee Republican Senator Bob Corker, a committee member, on crafting an agreement they hope will win broad support. Its release is expected within days.

Ernst & Young Real Estate Outlook 2010

The accounting firm of Ernst & Young recently polled 55 U.S. Real Estate Fund Managers to get their view on the real estate market for the next year or two.   The results of the poll are informative if you are planning to allocate resources to real estate in 2010 or 2011:Los Angeles skyline

Some of the highlights of the U.S. poll results:

The majority of respondents anticipate soft U.S. employment numbers throughout 2010 leading to a combination of declining rental rates and declining occupancy levels in the U.S.

Capital markets will open slowly throughout 2010 increasing the availability of debt and equity capital.

Eroding real estate fundamentals will put downward pressure on valuations during 2010.

The banking community is expected to increasingly start taking action on maturing real estate loans through sale or foreclosure.

The overwhelming majority of respondents expect greater opportunities to acquire real estate at distressed prices at the close of 2010 than in 2009 as bid ask spreads are expected to narrow and transaction velocity increase.

Not a very optimistic outlook for 2010 for property owners, but it looks like opportunities for property buyers.

To view the report go here.

Are Buyers Overpaying For Investment Properties?

Robert Knakal in his StreetWise blog asks the question.

The title of this piece makes you wonder what is meant by “they should sell for”. What, after all, is value? Many people (particularly appraisers) feel that value is a very different thing than the price someone is willing to pay for a property. There are all types of qualifiers such as “an arms length transaction” between a “willing buyer and willing seller”, etc. As a broker who only represents sellers, I see value as the highest price that the most aggressive buyer will pay for a property. Whether the property is “worth it” or not is completely dependent upon the perspective of the buyer.

Arguments about value versus price versus worth can go on for quite a while. This column will not attempt to define the differences between these terms, but will merely look at the relative price levels investment properties are selling for today and try to figure out why.

One of the most evident trends in the investment sales market today is the acute imbalance between supply and demand. While I spend all of my time selling in the New York Metro area, it appears that these imbalances exit nationwide. Whenever I attend conferences across the country or speak with brokers working in major cities in the U.S., the story seems to be the same: Buyers are plentiful, there is a ton of capital on the sidelines and there is not much available for sale. Forget the infamous “bid / ask spread”. There is just not enough product on the market to meet existing demand.

Read the whole article here.

It all comes down to supply and demand. Sellers are not putting properties on the market now because they have expectations of getting higher prices at some future point in time than they can get now, or they are pricing their property above what most buyers are willing to pay. Buyers have expectations of being able to buy properties at a lower price than they have to pay today.

There is such a disparity between what the expectation of sellers are at this time, and what the expectations of buyers are at this time, that it is very difficult to find a basis for agreement on price.

Buyers, particularly institutional buyers have been pretty much out of the market for 18 months. As a result they have a lot of accumulated cash that they must invest. This oversupply of cash along with the undersupply of property to buy is keeping prices up.

As an example, there is a high-rise class-A newly-completed condominium project in Los Angeles. The cost to build the property was about $360,000 per unit (which includes the subterranean garage and all amenities). The loan on the property was about $275,000 per unit. The lender foreclosed on the property and put it on the market about a month ago. Buyers thought they would be able to buy the property around $250,000 per unit, or, at most, $275,000 per unit, which would make the bank whole. There were over 30 bidders on the property, and it will most likely wind up being sold for close to the $360,000 per unit that it originally cost. A lot of capital chasing a small amount of available property.

It will be interesting to see if some stabilization sets into the market this year. Stabilization would mean that the gap between seller expectations and buyer expectations would be close enough to get some transactions completed.

I’ll keep you posted.