Under improvements / Over improvements

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How much is the 4th pool worth on a property? How about the 29th bathroom? How about the 20th garage? These are absurd examples of “over improvements” in almost any market (unless your market included royal mansions), and present examples of how over improvements diminish in return as the number/quality of amenities increasingly exceed what is normal for a market area.

How do you value a home with one bedroom where 4 is typical? What about a 600 sq ft ranch in a neighborhood of 5,000 sq ft contemporary homes? What about a home with only a wood stove as a heat source? These are examples of under improvements and during valuation a key factor must be considered - “What portion of the market would be willing to purchase such a home?”

Decades of data, nationwide support the fact that buyers gravitate towards what is typical, and the buyer pool diminishes as you deviate from the mean in any particular amenity. Diminished buyer pools result in diminished demand, and therefore diminished value per unit. This is a principle across many economic fields and applies to real estate as well.

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Another way of stating this is that “The more of something you have, the less each individual thing is worth,” and one of the easiest and most consistent ways of seeing this in the market is land.

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Notice that as you increase the number of acres, the return divided by the total number of acres decreases. Some properties may have a better location in Armstrong County than others, and others may have sold above/below market value, but as a general rule, the trend is clear. Other amenities will have different shaped graphs - take pools for example. In the lower end of the market, pools offer no contributory value. The buyer pool in this range may not have the resources to maintain a pool, and therefore it is seen as a negative by part of the market, positive by some, and a net neutral overall. However, in the higher end of the market, this amenity can have a return (though nearly never higher than the cost of installation). However, imagine a buyers reaction to a second pool on a half acre lot. This would be seen as a liability that needs to be fixed not as an amenity, and therefore have a negative appeal. The second pool’s value on the graph would drop below zero, and so on.

When building/remodeling a home it is vital to consider, “What is normal for my market/buyer pool?” The wider of a divergence from “normal” will result in decreasing returns and difficult sales in the future.

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Can we trust regression in amenity valuation?

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Big data is the buzz word of the real estate industry right now. Multi-million dollar companies are popping into existence claiming to have the “right formula” for residential valuations - only to a few years later go bankrupt, (like Xiao which claimed to have the special sauce, only to re-brand as Clarocity which claimed the same, only to re-brand back to Xiao when their stock declined 98.5%, Or Housing Canary, or others). Fannie and Freddie claim to have the special sauce in the “Collateral Underwriter” but appraisers nationwide report that the output in all but the most uniform of areas is still just short of gibberish.

At the core of all of these algorithms is math, and much like stock market prediction, the math is complex, unproven and not for the faint of heart. Dr. Jason Osborne of NCSU gives 4 fundamental assumptions that must be true for multiple regression (the system at the core of these systems and most available to appraisers) to be reliable (read his paper here: https://pareonline.net/getvn.asp?v=8&n=2). These four assumptions are:

Homoscedasticity and Variables are normally distributed

This very large word means that the distribution falls evenly around the regression line. These both have to be tested on a case by case basis. However, since appraisers receive no mandatory college level statistical analysis, its too easy for appraisers to trust the tools that they are given that claim to be doing the analysis for them.

Variables are measured without error

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At this point, most appraisers are laughing. Appraiser’s know that the data present in their local MLS has often been “fluffed,” (the word used in the real estate industry for what agents do to make a property look more appealing without outright lying). However, “fluffing” a 2 bedroom home with a windowless den in the basement into a 3 bedroom home is misleading at best. We also know that assessors are not always the most reliable home measures, sometimes included the below grade square footage with the above grade. The data sources that the regression here relies upon cannot be pushed through with out significant cleaning. This is why multiple companies over the last 10 years have been stealing this data from each other, because the raw data is worthless.

A linear relationship between independent and dependent variables

On this point, decades of real estate education again teaches us that regression in real estate fails this test. The “Law of Diminishing Returns,” bluntly states that the relationship of amenities to value is NOT linear, but rather a diminishing curve. Land is the easiest example to showcase because vacant land sales prove it time and time again.

From here we see that the price per acre (vertical) of land decreases as the number of acres (horizontal) increases. This is the “Law of Diminishing Returns” at work. This is true of all of the amenities in real estate (Square footage, bathrooms, pools, etc). As the number of amenities increase, the contribution to the overall value decreases.

From here we see that the price per acre (vertical) of land decreases as the number of acres (horizontal) increases. This is the “Law of Diminishing Returns” at work. This is true of all of the amenities in real estate (Square footage, bathrooms, pools, etc). As the number of amenities increase, the contribution to the overall value decreases.

However a quick thought experiment is also helpful. Imagine a market in which there are only 3 homes. All are identical, all have identical lots, square footage, bedrooms, quality, and condition. There is only 1 difference between the 4 homes, the number of bathrooms.

House #1 - has no bathroom, at all, anywhere

House #2 - has two full bathrooms

House #3 - has 35 bathrooms

Is the difference per bathroom between House #1 and #2 the same as between house #2 and #3. If you said no, congratulations, you understand the law of diminishing returns and that multiple regression CANNOT be trusted for real estate valuation. If you said yes, please contact me, I have a house to sell you.


In 2017, Town and Country Residential Appraisals reached out to the appraiser community online and asked appraisers to volunteer data from their various areas for us to examine (not to examine their appraisals, only the data that would typically be relied upon for regression). Appraisers from 6 different regions of the country responded. Aside from all 6 data sets failing tests 3 and 4 above, 5 of the 6 data sets additionally showed low levels of confidence in the data that they generated, some offering lower than 10% confidence that the data could be relied upon EVEN IF they had passed all four assumptions above.


Appraisers can not be complicit in handing over valuation to big data. This has already done damage to the American people and economy, and will only continue to.

There is so much more to say on this subject ie. the importance of P and R squared values, sample sizes, confidence intervals, outliers, etc. However for more reading on this subject, please refer to the following for a primer on these subjects and why linear regression isn’t everything: http://resources.esri.com/help/9.3/arcgisengine/java/GP_ToolRef/Spatial_Statistics_toolbox/regression_analysis_basics.htm

Analyzing Complex Market Areas

Some market areas are easier to analyze than others. A market area can be as small and contained as a single condominium plan. Other times, they have very irregular features. Today we’ll use the Freeport School District as an example, an area that covers areas in 2 counties, and at least 3 very distinct market areas. In addition to this being an analysis of a market area, this will also serve as a short example of some of the more simple steps that appraisers use in developing opinions of market areas, differing market ability, and comparable selection pools.

First we will start with a marked map of the school district.

Here we see the outline of the Freeport SD, with an approximate border of the Butler/Armstrong County line, with Butler County being to the left and Armstrong County being to the right.

Here we see the outline of the Freeport SD, with an approximate border of the Butler/Armstrong County line, with Butler County being to the left and Armstrong County being to the right.

This is a map of the sales in the Freeport School District over the last 3 years (from 04/30/2019). A quick glance shows that the supply and demand dynamics. There is a dramatic increase of sales in Butler County vs. Armstrong.

This is a map of the sales in the Freeport School District over the last 3 years (from 04/30/2019). A quick glance shows that the supply and demand dynamics. There is a dramatic increase of sales in Butler County vs. Armstrong.

When we look at sales over all time, this trend becomes even more obvious.

When we look at sales over all time, this trend becomes even more obvious.

If we apply a price limiter ($300,000+) to evaluate the marketability difference, we see an even more exaggerated difference. This shows that of the total 223 sales in all of the recorded MLS, 199 sales have been in the Butler County Area, while only 24 have been in the Armstrong County side (830% more). These kind of findings demand that we analyze if these two markets, serviced by the same school districts, are comparable.

If we apply a price limiter ($300,000+) to evaluate the marketability difference, we see an even more exaggerated difference. This shows that of the total 223 sales in all of the recorded MLS, 199 sales have been in the Butler County Area, while only 24 have been in the Armstrong County side (830% more). These kind of findings demand that we analyze if these two markets, serviced by the same school districts, are comparable.

Med Sale Price Med Taxes Med Tax Ratio Med Lot Med Year Built

Freeport Borough $60,000 $1,540 .026 City 1932

Armstrong County $139,900 $2,204 .016 1.66 1984

Butler County $183,500 $2,316 .013 .87 2001

Why are 400 homes scheduled to be constructed in Butler County when there are still unsold lots? Why have lots sat unsold in Armstrong County for a decade? The numbers tell us that there is a dramatic marketable difference between the two areas. Why do Freeport homes sell for so little? In part, because they are much older than the competing offerings and suffer a tax ratio of double that of the competition. The areas located in Butler County has easier access to the amenities of the 28 corridor leading in to Pittsburgh and Route 356 leading to Butler, lower relative taxes, the same great school system (ranked 79th in the state, and much higher than the neighboring districts) and buyers have been willing to pay a premium for this.

In addition to these basic tools, we also use pivot chart analysis, regression analysis and moving averages to determine if competing market areas are comparable, but that is for another time.

Are similar properties across this invisible county line comparable? Yes and no. They can be comparable, however, the market appeal of living in this superior market area of Butler County has to be reflected in the analysis in attempting to compare properties. Whenever comparable sales are available within the same area, it would be misleading to go into the adjoining area. We hope that this simple breakdown helps agents understand differences in market areas and how to better select comparable sales for their clients to consider.

How do I appeal my real estate taxes?

Before we discuss how to file a property tax appeal, lets first understand why this may be necessary. What is a “Property tax/County assessment?” An assessment is NOT:

  1. An appraisal - it is at best a rough estimate, and lacks all of the precision of an appraisal.

  2. Equal to the properties market value - many counties in the region we cover are working off assessments from pre-1990, and have little to no relationship with the market value of the homes they have assessed.

  3. Performed by certified appraisers - while counties can, and often do hire organizations/individuals with this experience, there is no requirement for this to be the case.

These facts alone should cause anyone pause before trusting that their tax assessment is accurate. Further, these facts explain why so many county assessments differ wildly from the actual market value of the home. So how is an assessment performed, and where do the errors most commonly occur?

  1. Data from across the region is compiled to estimate contribution of amenities.

    • In areas where data is abundant, this can result in reliable data. However, in rural areas, where data is limited, calculations based on limited data produces errant results. In the Indiana County reassessment of 2014-2015 this was the source of a great deal of error. Land values were miscalculated using non similar land sales and resulting in land assessments in rural parts of the county being assessed as if they were in the more developed areas where more land sales were available.

  2. Inspectors review the outside of the dwellings, and take notes.

    • While the exterior is an important part of the home… its certainly not all of it. In the case of Indiana County, inspectors with no real estate experience were given a few hours training and sent out to inspect. This resulted in nearly every property in Indiana County with an unfinished attic above their garage being reported as having an “apartment.” This led to additional assessment to the property for nothing more than a storage space.

  3. Assessors put this general data (with all of the errors that come from limited inspection) into a one size fits all algorithm that spits out a number.

    • Garbage In - Garbage Out. If any part of the information gathering process is in error then the algorithm will produce increasingly errant results. If the data on the specific property is in error, then the results will be errant. If BOTH are in error then the results will multiply the errors.

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So, how can home owners who feel that this process has produced an inaccurate result appeal their assessment and therefore the taxes based on it?

  1. Get a copy of your tax card. This is a public record that you can request and ask for someone to explain. If there are factual errors (garage apartments that aren’t there, too many bedrooms/baths, basement finish that doesn’t exist, etc), you can ask that they be corrected. In these cases the assessor may ask for photographic evidence.

  2. Beyond this, if you feel that the final assessment value is inaccurate, it will require an appraisal to file an official tax appeal. Annual deadlines differ from county to county, so be sure to contact your assessment office and ask about the process/timeline. This will require that a professional, specific valuation of your property be provided as evidence that the non-specific, possibly non-professional assessment is in fact wrong.

Town and Country Residential Appraisals provides services for assessment appeal purposes for Indiana, Allegheny, Westmoreland, Armstrong, Butler, Cambria County, and would be glad to serve you.

FHA / USDA Financing

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Over the course of the past 3 years, in the entire area that the West Penn Multi List covers, approximately 20% of all sales had FHA or USDA financing. In areas that are more rural in nature, this number bumps up slightly. However, when we look at these areas in the $100,000 and below range, that percentage jumps to 33%. All this to say, if you are a real estate agent servicing the market areas covered by the West Penn Multi List, FHA and USDA financing is unavoidable.

However, sadly, there are 0 hours of mandatory education to assist agents in understanding these products that buyers and sellers are agreeing to make contracts over. We hope that this short blog gives you some basic information necessary to help inform buyers and sellers so that they can make the most informed decision possible, and so that frustrations and misunderstandings are kept to a minimum.

FHA and USDA loan requirements are laid out in the HUD 4000.1 (available here: https://www.hud.gov/program_offices/housing/sfh/handbook_4000-1 | See sections: II.A.3.a,b - there are other pages, however this covers the highlights) This dictates to loan officers, investors, appraisers, underwriters and others involved in the loan process what conditions the loan/home/borrower must meet in order for the loan to be insured by one of these organization. In no uncertain terms, if any of those fail the requirements, the loan cannot be made. The loan underwriter has ultimate responsibility to ensure that these factors meet the minimum requirements. The appraiser in this scenario acts in a sense as the eyes, ears and sometimes nose of the underwriter in the home. Our report points out deficiencies in the property generally, as well as those that would disqualify the property from FHA/USDA financing.

The chipping and peeling paint that exposes the wood surfaces to the elements on homes of ANY age… will need to be painted per the HUD 4000.1 guidelines.

The leaking roof… it will need to be repaired.

The strong gas odor… will need to be inspected by a qualified professional.

We occasionally hear the complaint, “But the last appraiser didn’t make a big deal about it!?”

A couple of thoughts here:

  1. Perhaps the last appraiser wasn’t performing a FHA/USDA appraisal. Perhaps it was a conventional loan?

  2. Perhaps the issue wasn’t present at the last inspection?

  3. Perhaps the appraiser missed it - in which case they could be liable for the error.

All of these aside however, for an appraiser to intentionally overlook a HUD 4000.1 deficiency just to “make the deal work,” is mortgage fraud. Period. Pressuring an appraiser to do so isn’t a great idea either.

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There are some grey areas that require interpretation, and as often as possible we reach out to the appropriate body so that they will make a determination. The size of bedroom window egress is a great example. The HUD 4000.1 requires that a bedroom have direct exterior egress, however, it stops short of any specifics. What constitutes egress for a 6 foot tall man is not egress for a 4 year old girl? What size must the window be / how close does the window have to be to the floor? However, a window that is painted shut is not egress for anyone during a fire.

This gets to the point of all of these regulations. The Department of Housing and Urban Development composed the HUD 4000.1 to ensure that families buying homes with this financing would not only have a roof, but one that would last. Not just a house, but a safe home. As an agent (and as appraisers) we have close alignment in these hopes for the consumers that we come in contact with on a daily basis.

>>> DOWNLOADABLE FILE OF FHA/USDA

>>> WE OFFER IN OFFICE TRAINING ON THESE TOPICS >>contact us link

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Risky buisness: Property Inspection Waivers

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While Property Inspection Waivers (PIWs) are rare in the Pennsylvania, and will likely remain so for some time to come, however it is vital to stay informed about this “product” in the coming years. PIW’s advertise that they will speed up the closing process, however, at what cost? In many cases the buyer is still charged for a full appraisal, however the home they are potentially purchasing is not appraised by a real estate professional. Instead the property is “valued” using an algorithm used by Fannie Mae or Freddie Mac. So, while faster, there is often no financial savings to the consumer. Further, the borrower is then placed at risk of purchasing an overpriced home.

PIW’s use data available from the local area (which we have witnessed over the past 3 years is often wildly inaccurate) to choose similar properties (again, we have seen these are often horrible comparables), based on public records (which are often suspect) to attempt to place a value on the home based on multiple regression (which according to the work of mathematician Dr. Jason Osbourne of NCSU is not reliable except in the most cookie cutter of home plans).

So…

  1. Bad neighborhood definitions

  2. Bad comparable selections

  3. Bad public records of those bad comparables

  4. Bad analysis based on all that information… WHAT COULD GO WRONG!!!

This is essentially an arms race between Freddie Mac and Fannie Mae on who can do the least amount of care. Competition between Freddie Mac and Fannie Mae should not result in a race to the bottom on due diligence, especially while the agencies remain in conservatorship.
— Virginia Coalition of Appraisal Professionals

Who will borrower’s be suing for giving misleading valuations? An algorithm? The government sponsored entities of FNMA Freddie? No, their first and easiest target will be the individual charged with representing their interest… their Real Estate Agent/Broker.

Some words of advice to brokers and agents:

  1. Protect your buyers - you have an ethical charge to represent your buyer’s interest, and in no way are their interests protected by a Property Inspection Waiver. Would you urge your buyer to “waive” a home inspection because the rest of the homes in the neighborhood look ok? Would you “waive” a septic inspection because the neighbor’s septic works fine? NO.

  2. Protect yourself - Fannie Mae/Freddie Mac has billions of dollars to protect itself with, making it a hard target. Protect yourself by always recommending that the borrower receive a professional home valuation which can only be provided by an appraiser.

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What kills real estate deals? Part 2

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Today we’ll take on the top 5 “deal killers,” and how real estate professionals can avoid these pitfalls.

Buyers and Sellers without professional help kill deals.

We see this on a regular basis, 1) sellers offer their property for sale without consulting a real estate agent, appraiser, or any other tool, 2) a buyer accepts the price, 3) everyone is baffled when the home’s value is much lower than the agree price. Do yourself a favor and call an agent or appraiser and get assistance on the single largest financial transaction you’ll ever make.

Hidden/non-disclosed defects kill deals.

“Disclose, disclose, disclose” - Its the partner in real estate to “Location, location, location.” Failure to disclose issues with the home could lead to a surprise on behalf of the buyer and underwriter - and neither typically react well to this. Further more, failure to disclose can result in legal troubles for the realtor that far exceed the state board’s punishments (As detailed in this article on legal ramifications: https://www.hg.org/legal-articles/violating-the-code-of-ethics-can-get-you-sued-26904). As an agent, if you know it, disclose it to all the parties. Inman lists failure to disclose as the #1 way that real estate agents get sued: https://www.inman.com/2015/08/25/10-most-common-ways-real-estate-agents-get-sued/

An agent can’t know everything, however, its your job to investigate, not overlook. Courts increasingly recognize the expertise that agents and brokers claim, and are holding them to that level of accountability.


Sales agreements above market values kill deals, and reputations.
Pricing properties takes years of experience. Sadly, this is not a skill that the current real estate education system emphasizes. A newly minted real estate agent has received 0 mandatory hours of education/experience in home valuation. Contrast that with a newly minted appraiser, who in Pennsylvania has a mandatory minimum of 200 hours of education plus a minimum of 1500 hours of experience in home valuation. We hope that in the future new agents will have many more opportunities opened up to them in this regard.

The CMA that an agent performs is vital in seeing a deal through to consummation and developing a good reputation. Priced too low and the property may sell, but you may have just guaranteed that no one in that family will ever use you again. Priced far too high, and the property may sit on the market for so long that the seller moves on to someone else. Three steps to a good CMA:

  1. Use sales primarily over active listings. These tell you what the market has accepted - not just what sellers want. In the last three years in Indiana County 50% of listings expired without a sale - over that same time real estate prices were holding steady, but listing prices were being driven higher. Now, after three years of this trend, home values are falling in the more rural areas of the county. Chasing the latest listing prices will often result in a waste of your time at best, and at worst a deal that falls through because the market value doesn’t support the listing price.

  2. Use the best sales available. Go back in time 3 years in the immediate neighborhood to find the perfect comparable, and allow that to inform your search for more recent sales. Find a few sales that are a little better/worse in every facet (size, lot, condition, quality, basement, parking, etc) and allow that to begin to form a range that your seller/buyer can fall in.

  3. Get advice. Some properties are unique - we see them all of the time, and they are hard to value. First, use your brokers experience to help you - they’ve got the title for a reason. However, when in doubt, we have brokers and agents who call us for our expertise in these areas. While USPAP doesn’t allow us to discuss value with someone involved in a assignment we are working on, we can certainly give advice on everything else that we aren’t working on. Further, sometimes a restricted use appraisal, which is often cheaper and shorter than a full appraisal, may be called for to determine a list/offer price for particularly complex properties - saving you months of work/headaches for a small fee.

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Uninformed buyers using the wrong financing kill deals.
In a world of 5 minute loan applications, sadly buyers think that’s all they need to know about the largest investment they’ll make in their entire life. The fine print in the loan may exclude manufactured homes, homes below a certain condition, homes near gas stations, etc. As the agent, you are the front lines to ask the question - “Will your bank write a loan on ____________?” and turn the buyer loose to do their homework. Recently we performed an appraisal for a lender who would not write a loan on manufactured homes - upon inspecting the home it was discovered to be a highly modified double wide - deal killed… by the appraiser? No, because the seller/agent did not know/disclose, and the buyer did not know, and the loan was therefore the wrong type. Anything else would have been mortgage fraud.

The agents are the experts and have the responsibility to investigate and inform. Here are a few thoughts:

  1. Investigate the property - if something makes you wonder, order the tax card, or get a second opinion and find out what is going on. In the case above, ordering the tax card from the county would have saved weeks of headaches.

  2. Know the basic mortgage products

    1. Portfolio - often the least strict lending terms. These loans are held by the bank for the lifetime of the loan, and never sold of the secondary market - therefore the property does not have to conform to Fannie Mae standards.

    2. Conventional - homes under these lending terms must adhere to the Fannie Mae selling guide, and all deficiencies of safety and structural integrity must be cured prior to closing. (https://www.fanniemae.com/content/guide/sel030619.pdf)

    3. FHA/USDA/VA - These loans are most strict, with a variety of additional requirements (all chipping and peeling paint cured, etc) Click here for our printable guides on these inspections. (HUD 4000.1 for USDA/FHA: https://www.hud.gov/program_offices/housing/sfh/handbook_4000-1) (VA MPR’s: https://www.benefits.va.gov/roanoke/rlc/forms/ci_guide_2005.pdf)

  3. “As-Is” is a recipe for lower sales prices. The vast majority of sales in our area are Conventional or USDA/FHA/VA loans. If the seller refuses to consider repairs that would be required by these products, they are eliminating (in some cases) up to 80% of the buyers in a market. That can have a devastating effect on the final sales price of the home. There are more creative ways to address these issues that will result in higher sales prices (seller reduces price and buyer does repairs, etc).

Underwriters, who choose not to assume risky assets, kill deals.

Underwriters have a fiduciary trust to write loans that will be secure. When they don’t, we get 2008 all over again. Understand that the underwriter (and the appraiser by extension, working for the bank to investigate the property on their behalf) have this responsibility and take it seriously. Some properties are too risky, and in those cases, cash is the only option.

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Can we trust the cost approach?

There are many things that people add to their homes that cost a great deal, yet add no value to a home. How well does the cost approach recognize and report this? Pools add no value (and sometimes subtract from value) in rural, low priced neighborhoods in the northern parts of the country, yet most cost manuals still report contribution. How do we square the cost approach with other data.

There are many things that people add to their homes that cost a great deal, yet add no value to a home. How well does the cost approach recognize and report this? Pools add no value (and sometimes subtract from value) in rural, low priced neighborhoods in the northern parts of the country, yet most cost manuals still report contribution. How do we square the cost approach with other data.

Among appraisers, this is a highly debated matter. Some swear by the cost approach, others swear it can’t work. Institutions like FHA/USDA require it 100% of the time, while the VA does not. Some lenders require it (though it would appear that this is possibly for insurance purposes more than valuation). This is an attempt to look at the strengths and weaknesses of the approach. First lets look at the underlying assumptions:

  1. Cost (and income for that matter) approach is a derivative valuation methodology. Without the sales comparison approach, the cost approach can not exist. This is important to note, as this derivative data will be more prone to error the further it is removed from the primary data.

  2. Cost approach assumes accurate builder costs. The collection of cost to construct data is a time consuming matter which is why appraisers often use cost guides like Marshall and Swift. There are a few areas of concern here. A) That the costs for the region are calculated accurately. In our rural areas, new construction is rare, with the cost of renovating a home being far below that of new construction. So, where does the data come from in these rural areas? B) That the equalization factors are accurate. In truth, THIS is how those regional costs are calculated - by taking state and national cost averages and multiplying them by a regional factor. However, again, with limited cost data, how can an accurate multiplier be calculated? C) That time factors are accurate. Again, this suffers the same issues as above - however, also suffering that data is always backwards looking in its accuracy - from 2016-2019 builder costs have spiked, in some cases materials have seen a 20% increase, and yet in our markets sales have remained flat. Finally, these errors multiply, seriously weakening the model.

  3. Cost approach assumes accurate total economic life models. Marshall and Swift (a common cost estimator) gives no economic life above 65 years (Excellent quality, masonry home). Compare that to the dozen homes that are outside my window at this moment - homes of average quality, non-masonry (55 years by M&S) that have received only roofs, painting of the wood siding, and the bare minimum of updating to the interior in 1960 and yet have 30+ years of remaining economic life - yet are 114 years old. A polling of appraisers found realistic total economic lives of properties of this quality to range from 120-150 years. Yet M&S remains an industry standard? IF appraisers are to use the cost approach in a credible fashion, a radical divergence from the Marshall and Swift methodology is necessary.

  4. Cost approach assumes accurate effective ages. This is a purely subjective opinion based on sensitivity analysis. While this is not uncommon in the appraisal profession, it is sometimes presented as far more black/white factual than it truly is. Given that depreciation is based solely on 1) accurate builder costs which we see issues with, 2) accurate economic life models which are notoriously inaccurate, and 3) accurate effective ages which are a subjective analysis, we see that depreciation is fraught with possible error.

This is a serious stack of possible compounding errors that strike directly at the overall validity of the cost approach. Add to this the possibility confirmation bias to simply confirm the sales comparison approach indication. So, what is the cost approach good for?

  1. Contributory percentage to the whole. If we can validate the cost approaches relevance to market participants motivations, then the percentages of un-depreciated contribution of certain elements (bathrooms, below grade finish, overall quality, GLA) could theoretically be supported through this model without having to wade into the multiplying errors of points 3 and 4 above.

  2. Affects of condition (effective age) on the whole. Again, if we isolate only this factor, without multiplying possible errors, we can see what effect 10 years of depreciation would have on the overall value of the home, and derive support for condition adjustments from this.

  3. Age adjustments. If we can perform a series of cost approaches in a market vs. those same home sales, with an understanding that effective age is a factor of condition AND age, and find a way to tease these apart, then the result that would emerge would be the depreciation per year of the home. It should be noted however, that in teasing these two factors apart, a paired sales analysis would have to be performed in order to extract the condition adjustment before determining the depreciation per year.

Anytime that we use multiple parts of the cost approach however, we are introducing the possibility of error into the approach. However, that is true of ALL approaches to value. The more factors adjusted for in the Sales Comparison approach, the more possible errors- the strength of the sales comparison approach is bracketing. If all amenities are bracketed, we have greater confidence in the final range, with weighted analysis coming to a final conclusion. We have no such tool in the cost approach. Within the Income Approach, we become increasingly concerned with more and more adjustments (increasing gross percentages). If all factors are bracketed we have greater confidence in the output GRM range, with weighted analysis coming to a final conclusion. But with the cost approach, there is no bracketing, and therefore is the weakest of all of the approaches to value. It is very likely that in the future, this approach will be retired.

Of all of the approaches to value, the cost approach is probably the most open to error, confirmation bias and abuse. Even in new construction, the cost approach CAN NOT inform the appraiser of what the market is willing to pay apart from the sales comparison approach, and as a result serves a limited value. Cost approach serves a purpose in possibly extracting contributory value in difficult markets (though we have seen absurd data such as $3,000 contribution for a full bathroom in a $750,000 home, which the sales data and any real estate professional does not support). The cost approach is a severely limited tool, but good if used properly. A hammer is a very effective tool - just don’t use it the wrong way, you’ll just look silly.

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2019: 1st Third Analysis

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As we enter 2019, with a slowing national housing market, trade wars, erratic stock market, tensions in the south pacific and in the gulf, and yield curve inversions, it's hard to see past the forest of new information. We want to provide you with basic countywide market trends and analysis to help you be better informed.

Why a third and not a quarter? Many of the markets that we cover in this report have limited data, which makes analysis difficult, yet we wanted to be able to provide some level of seasonal analysis. Quarter’s would be ideal, however, by extending the data to four months instead of three we gain 33% more data, and therefore more able to make reliable statements. It's odd, we know, but hopefully you find it helpful.

A note to begin: None of the above are singular market areas. In the two leftmost graphs are whole counties. They are placed together only because they have somewhat similar price ranges. Each of these areas has dozens of markets within them, and to represent the county trend as the market trend would be foolish. On every report that we produce we analyze the micro market of the subject and the surrounding competing markets when needed. However, to do this for a blog like this, would be to time intensive.

First up, let's look at Armstrong and Indiana Counties above (Armstrong: Blue / Indiana: Grey / 30 Day moving averages). These are both rural counties with some pockets of built-up areas (Indiana Borough, Kittanning, Homer City, Blairsville, Ford City, etc). Armstrong County as a whole has experienced typical seasonality, with a lower number of homes in the winter selling for slightly lower than the median prices would typically indicate, and a rebound towards the mean as we move into the late spring and the market begins to heat up. Indiana County, however, continues to struggle with low demand and a faltering median home price. While Indiana began to redound from typical seasonality, the month of April saw yet another decline. This is consistent with a now 2-year decline in home values in Indiana County. Leading this trend are the rural areas of the county, however, even White Township (the area just outside of Indiana Borough) has even recently begun to show signs of decline. Homer-Center School District is showing declines of as much as 7.5% per year, however, even the higher end homes of White Township are now showing a decline of 1.5% per year. Listing prices in Indiana County have begun to be in step with this (whereas a year ago they were increasing as prices were falling) however the degree to which listing prices are decreasing is lagging market prices similar to before. Overall, Armstrong County has a generally stable market, while Indiana County has weakening marketability (in part due to the past reassessment, more recent job closures, the declining population of IUP). While White Township had previously appeared to be resistant to this decline, it now appears to be moving with the county overall. It is possible that in the next year this trend could spill into the one area that has been resistant to the trend thus far: Indiana Borough.

In the year ending April 30, 2019, there were 451 sales in Armstrong County, while there are 227 homes currently on the market (Absorption rate of .166), indicative of a balance for the county which would likely indicate a continuing stable market. In the year ending April 30, 2019, there were 441 sales in Indiana County, while there are 384 homes currently on the market (Absorption rate of .096), indicative of an oversupply for the county which could continue to put downward pressure on home prices.

Next up, Butler and Westmoreland County above (Butler: Orange / Westmoreland: Yellow / 30 Day moving averages). These counties have mixtures of rural (Derry Twp and Karns City area for example) as well as very dense population centers nearer to the city (Cranberry Twp and Murrysville - not saying these are comparable, just having some similarity of density. Cranberry has experienced rapid growth in the last 15 years, which is in part reason for the higher sales prices) with wide ranges of appeal between them. Again, both are moving higher after seasonal softening in the winter months, however, Butler County with more sales is advancing more rapidly. Butler County has moved in a relatively steady direction from the winter lows, however, Westmoreland County appears to have had a week late March into early April. Reasons for this trend in relation to their neighbor Butler aren’t immediately apparent, but it is worth observing.

In the year ending April 30, 2019, there were 2,131 sales in Butler County, while there are 1,038 homes currently on the market (absorption rate of .171), indicative of a market in balance. In the year ending April 30, 2019, there were 3,768 sales in Westmoreland County, while there are 1,729 homes currently on the market (absorption rate of .182), indicative of a market in balance, or with a very slight undersupply.

Finally, the right two graphs are the 5 divisions of Allegheny County. These areas are highly complex, with massive differences in market areas even within these five divisions. Here we’ll offer the Absorption rate and linear regression analysis for the year ending on April 30, 2019, with current market data for listings.

Allegheny East (Dark blue line above) had 4,289 sales in the last year with a total of 2,050 properties currently on the market (Absorption rate of .174), indicating that supply and demand are in balance. It started as the second highest median sales price area and ended the third highest. This was the third fastest growing area of the five for that time period.

Allegheny North (Orange line above) had 4,246 sales in the last year with a total of 1,687 properties currently on the market (Absorption rate of .210), indicating that there may be an undersupply. This started and ended the first four months with the highest median sale price and had the slowest appreciation of the five areas.

Allegheny Northwest (Black line above) had 1,259 sales in the last year with a total of 472 properties currently on the market (Absorption rate of .222), indicating that there may be an undersupply. It started as the 4th highest median sales price of the four and ended the first four months as the second highest median sales price. This was the fastest growing median sales price of the five areas for the first four months of this year.

Allegheny South (Yellow line above) had 4,264 sales in the last year with a total of 1,492 properties currently on the market (Absorption rate of .238), indicating that there may be an undersupply. It started as the third highest median sales price area and ended the fourth highest. This was the fourth fastest growing area of the five for that time period.

Allegheny West (Light blue line above) had 937 sales in the last year with a total of 330 properties currently on the market (Absorption rate of .237), indicating that there may be an undersupply. This started and ended the first four months with the lowest median sales prices. This was the second fastest appreciating market over this period.

This data is isolated to the first four months of the year, coming off of the lows of mid-winter. Attempting to extrapolate this to an annual trend would result in enormous errors. Every one of the above areas for the year ending on April 30, 2019, experienced declining median sales prices and an increase in DOM over that time. The increases of the last 4 months have largely been seasonal, and in all cases have not corrected for the decline of 2018 (gray bars). Absorption rates above .20 traditionally indicate a sellers market, while absorption rates below .15 tend to indicate a buyers market. As you can see, Indiana is firmly in buyers market territory, while all but Allegheny East , in Allegheny County are in various states of buyers markets.    Why the decline?   On the macro scale: Days On Market trending upward would indicate that homes on the market are higher than the buyer pool has a tolerance for generally - and that isn’t just a Pittsburgh issue, that was the story of the real estate market across the United States in 2018. The new generation (Millennials) coming into the home ownership age bracket has more debt than any generation before due to climbing education costs and falling wages when adjusted for inflation. Paired with the fact that the Baby Boomers are rapidly approaching the median life expectancy (2025), unless something unforeseen changes, this will likely mean a few years of slower than typical growth - or possible decline, as demand stays lower than typical and supply increases. Climbing interest rates in Q4 additionally put downward pressure on the real estate market across the US. Current forecasts indicate an increase of .25% over the summer off of their current 14 month low (note: an increase of .50% in the fall was paired with one of the slowest real estate markets in a decade).  On the micro scale: We expressed the reasons we believe for Indiana County above. The remaining counties have higher proximity to Pittsburgh and late 2018 saw the finalizing of the Amazon plans to build elsewhere, this may have deflated a small speculation bubble around hopes of development. We’re hopeful that a new distribution facility in Indiana County will provide some relief to the market. We also realize that there are very HOT markets in the midst of some of these declines, however, this is a bird's eye view of the region. Our area continues to move forward, navigating the transition from old industrial towns to what we are becoming. Leadership, investment, job opportunities, and creative thinking will be necessary to be successful.   Disclaimer: These graphs and analysis are based on all data available in these markets, REO, estate sales, distressed sales, and others. Micro-market trends can have huge impacts on prices, and these trends should not be extrapolated to all markets within these counties. Appraisals take as primary the immediate market area of those subject properties, and analyze differences of marketability that can change over the course of a tenth of a mile - much more those than can change from one end of a county to another.

This data is isolated to the first four months of the year, coming off of the lows of mid-winter. Attempting to extrapolate this to an annual trend would result in enormous errors. Every one of the above areas for the year ending on April 30, 2019, experienced declining median sales prices and an increase in DOM over that time. The increases of the last 4 months have largely been seasonal, and in all cases have not corrected for the decline of 2018 (gray bars). Absorption rates above .20 traditionally indicate a sellers market, while absorption rates below .15 tend to indicate a buyers market. As you can see, Indiana is firmly in buyers market territory, while all but Allegheny East , in Allegheny County are in various states of buyers markets.

Why the decline? On the macro scale: Days On Market trending upward would indicate that homes on the market are higher than the buyer pool has a tolerance for generally - and that isn’t just a Pittsburgh issue, that was the story of the real estate market across the United States in 2018. The new generation (Millennials) coming into the home ownership age bracket has more debt than any generation before due to climbing education costs and falling wages when adjusted for inflation. Paired with the fact that the Baby Boomers are rapidly approaching the median life expectancy (2025), unless something unforeseen changes, this will likely mean a few years of slower than typical growth - or possible decline, as demand stays lower than typical and supply increases. Climbing interest rates in Q4 additionally put downward pressure on the real estate market across the US. Current forecasts indicate an increase of .25% over the summer off of their current 14 month low (note: an increase of .50% in the fall was paired with one of the slowest real estate markets in a decade).

On the micro scale: We expressed the reasons we believe for Indiana County above. The remaining counties have higher proximity to Pittsburgh and late 2018 saw the finalizing of the Amazon plans to build elsewhere, this may have deflated a small speculation bubble around hopes of development. We’re hopeful that a new distribution facility in Indiana County will provide some relief to the market. We also realize that there are very HOT markets in the midst of some of these declines, however, this is a bird's eye view of the region. Our area continues to move forward, navigating the transition from old industrial towns to what we are becoming. Leadership, investment, job opportunities, and creative thinking will be necessary to be successful.

Disclaimer: These graphs and analysis are based on all data available in these markets, REO, estate sales, distressed sales, and others. Micro-market trends can have huge impacts on prices, and these trends should not be extrapolated to all markets within these counties. Appraisals take as primary the immediate market area of those subject properties, and analyze differences of marketability that can change over the course of a tenth of a mile - much more those than can change from one end of a county to another.

Fun Fact: What are those hard vertical lines? Those are agents not doing closings on weekends (pushing extra data into the other 5 days, and gaps appearing weekly around weekends - good for you guys keeping your families first in the real estate race!

The Housing Crisis: 10 years later (part 5)

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The prior 4 articles were written through our Facebook page prior to October 2018. Now that we are 6 months on from those posts, we want refer you to some great information written just after our series. In the prior posts we looked at the lessons learned, patterns and warnings of the 2007-2008 housing collapse. The previous reporting that we shared showed that many of the dangers that caused the 2008 collapse are still in place, and that many of the safe guards against it happening again have been slowly dismantled. While this has occurred, other portions of the market (consumer debt, student loans, international market weakness, and growing national debt, rising interest rates) have shown increasing weakness, beyond that seen in 2007. There are many factors that represent a head wind to the US economy and housing market in 2019-2020. If 2007 warns us of anything, it will be to watch out for increasingly unethical strategies by the banks to attempt to protect their bottom lines.

Housing starts have slowed in 2019 Q1, Days on market have increased, and price appreciation has flattened in the growth season nationwide. All while consumer confidence is falling, and jobs increases were lower than typical for the last 5 years.
https://www.cbreglobalinvestors.com/insights/americas-watch-april-2019/

Since our last post, numerous high end markets have seen significant downturns nationwide.
https://www.wsj.com/articles/wealthy-greenwich-home-sellers-give-in-to-market-realities-11555348468

40% of commercial real estate executives (owning a total of 2 Trillion dollars in property) believe the commercial market has peaked and plateaued. With market confidence falling 5% year over year. http://www.rer.org/Q1-2019-Sentiment-Index/

Canada’s housing market showed a 30% decline year over year. THIS is a brilliant analysis of the current market forces that are facing the US economy, and how higher Dow Jones levels are not the only thing to be watching:
https://seekingalpha.com/article/4240221-housing-market-crisis-2_0-jury-2018minus-2019

Since our last post, “the yield curve” has inverted (a historic measure of the difference between the 3 month and 10 year Treasury yields). This has been a historic indicator of recessions. https://www.advisorperspectives.com/articles/2019/04/01/a-historical-perspective-on-inverted-yield-curves

The current macro real estate market has significant signs of weakness that should not be ignored. Previously “Hot markets” (read also, “overheated”) will likely see the impacts of such corrections. Pockets of the greater Pittsburgh area, specifically higher end new construction, and areas that have experienced explosive growth of development, are likely most vulnerable to these trends if they become more wide spread.