Case-Shiller: Seattle Sees Nation’s Biggest Price Gains

Let’s have a look at the latest data from the Case-Shiller Home Price Index. According to January data that was released today, Seattle-area home prices were:

Up 1.1 percent January to February
Up 11.0 percent YOY.
Down 1.7 percent from the July 2007 peak

Over the same period last year prices were up 0.9 percent month-over-month and year-over-year prices were up 7.1 percent.

The Seattle area’s month-over-month home price change hit the highest level since May. The year-over-year price change in February hit its highest point since April 2014. If you were hoping for some price relief, so far 2016 is not delivering.

Here’s a Tableau Public interactive graph of the year-over-year change for all twenty Case-Shiller-tracked cities. Check and un-check the boxes on the right to modify which cities are showing:

Seattle’s rank for month-over-month changes was shot up from #8 in January to #1 in February.

Case-Shiller HPI: Month-to-Month

Hit the jump for the rest of our monthly Case-Shiller charts, including the interactive chart of raw index data for all 20 metro areas.

In February, just one of the twenty Case-Shiller-tracked metro areas gained more year-over-year than Seattle (the same as January):

  • Portland at +11.9%

Washington and Oregon obviously still have an economy that is literally the envy of other states.

San Francisco joined Denver, Portland, and Dallas in the club for metro areas that hit new all-time highs in February.

Eighteen metro areas gained less than Seattle as of February: Denver, San Francisco, Dallas, Tampa, Los Angeles, Detroit, Las Vegas, San Diego, Miami, Atlanta, Phoenix, Charlotte, Minneapolis, Boston, Cleveland, New York, Chicago, and Washington.

Here’s the interactive chart of the raw HPI for all twenty metro areas through February.

Here’s an update to the peak-decline graph, inspired by a graph created by reader CrystalBall. This chart takes the twelve metro areas whose peak index was greater than 175, and tracks how far they have fallen so far from their peak. The horizontal axis shows the total number of months since each individual city peaked.

Case-Shiller HPI: Decline From Peak

In the 103 months since the price peak in Seattle prices are down 1.7 percent.

Lastly, let’s see what month in the past Seattle’s current prices most compare to. As of February 2016, Seattle prices are approximately where they were in April 2007. Note that this does not adjust for inflation.

Case-Shiller: Seattle Home Price Index

Check back tomorrow for our monthly look at Case-Shiller data for Seattle’s price tiers.

(Home Price Indices, Standard & Poor’s, 2016-04-26)

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

46 comments:

  1. 1
    AverageJoe says:

    We have not had a affordability post since Nov 24 2015. Time for an affordability analysis.

  2. 2
    The Tim says:

    RE: AverageJoe @ 1 – Good call. I will post an update to the affordability index this week.

  3. 3

    It will be interesting to see how appraisers deal with our market given the rate of change (which as probably just increased since the period of this data).

  4. 4
    uwp says:

    RE: Kary L. Krismer @ 3 – Have you noticed any issues this Spring? We bought in Feb and our appraisal came in on the button, but we were sure nervous! Had a co-worker’s come in low, really screwed things up.

  5. 5
    Doug says:

    Do appraisers have any incentive to appraise a property lower or higher? Do they care if they will potentially destroy a deal or are they more likely to apathetically rubber stamp a property, collect their fee, and move on to the next?

    Do banks tend to favor appraisers who have historically been more conservative?

    Maybe it’s not a good comparison, but the process seems analogous to the issuers and credit rating agencies.

  6. 6
    Shawn says:

    I’ve had my mortgage broker ask that another appraiser be used because the one that was assigned to my loan was notorious for being conservative. I think he told me that he had 24 hours for a new appraiser to be assigned to the loan.

  7. 7

    By uwp @ 4:

    RE: Kary L. Krismer @ 3 – Have you noticed any issues this Spring? We bought in Feb and our appraisal came in on the button, but we were sure nervous! Had a co-worker’s come in low, really screwed things up.

    I don’t tend to comment on recent transactions, so since we’re barely into spring–no comment.

    The reason I raised the issue is I have seen buyers’ offers which are effectively offering “whatever the appraiser says it is worth” because the offer is clearly more than the property is worth AND the buyer is not offering to put more money down than the X% their financing agreement says they have to (e.g. 20%). It’s just part of buyers getting desperate. But without more money down to back up the offer they really are not offering anything in particular.

  8. 8
    Kmac says:

    RE: Doug @ 5
    I had an appraisal done late January of this year.

    It had language in it that I found interesting.
    I’m sure they are just performing cya in case R/E turns down again, but interesting nonetheless:

    “Market Research & Analysis” section of the report:
    …………………………………………………………………………………………………………………………………………………..

    “Foreclosures have affected this sub market of the Puget Sound area, but the bigger impacts have come from the loss of jobs and restrictions on the types of loan programs and credit. The foreclosure numbers are beginning to remain constant or even a slight decline. However, this could change if the banks release a good portion of their shadow inventory of homes taken back during the past four years.”
    …………………………………………………………………………………………………………………………………………………………..

    I can’t count how many times I have heard that people claiming that the banks having “shadow inventory” is nothing but scare mongering and an over dramatization, but here we have an appraiser utilizing language that implies that it may actually be a fairly large number.

  9. 9
    Blurtman says:

    A home in the neighborhood will be on the market at the end of the month. We know the owners. The home is 4 beds 2.5 baths 2,500 sqft. On a 1/4 acre. Built 2000. The Zillowmeter says $670k. The realtor said to list it at $800k and a Chinese family will likely buy it. I was floored when I heard that. Stay tuned.

  10. 10
    Som says:

    RE: Blurtman @ 9 – The ground reality is that the sellers can literally ask potential buyers to dance on the street as a show of commitment.

    And you’ll see middle aged couples dancing on the street and willing to pay $850K for the house.

  11. 11
    redmondjp says:

    By Som @ 10:

    RE: Blurtman @ 9 – The ground reality is that the sellers can literally ask potential buyers to dance on the street as a show of commitment.

    And you’ll see middle aged couples dancing on the street and willing to pay $850K for the house.

    Not necessarily true. There is an upper limit, and if you set the asking price too high, not only will you not have a multiple-offer situation, you will likely have a no-offer one. Setting the listing price at the proper level is very important! You want to get several strong buyers into play, and by pricing it too high initially (even if that price could easily be exceeded in the ensuing bidding war) you can scare the buyers away (as happens on Ebay).

    I’ve seen four houses in my neighborhood over the past couple of years where the price either is, or was, too high. In a tight market, a mile away from Microsoft, if your brand-new house takes almost a year to sell, the price just might be too high (and/or it has other issues, like being on a very busy street with only one-way access to your driveway).

  12. 12
    reaLOL estate says:

    It’s cute that February data shows San Francisco up 9% YOY – March data says the hottest real estate market in the nation saw it’s first YOY decrease in years. It looks like the tech bubble is starting to deflate (see MSFT, GOOGL, TWTR, AAPL) and this stock market bull run is in extra innings. Is this a bellwether for Seattle? Emotion is a fickle mistress and a drop in sentiment could cool this overheated market pretty quickly.

    http://fortune.com/2016/04/15/san-francisco-housing-prices-drop/
    http://money.cnn.com/2016/04/14/real_estate/san-francisco-home-prices-drop/

  13. 13
    StupidLifeDecisions says:

    I don’t see how this can last another year, I’m not saying it won’t, but I don’t see how it can. Layoffs are starting to trickle in, consumer spending is way down, so it seems to me like we have a major economic downturn coming around the corner. The company I work for is doing lay offs, the company my brother works for is doing lay offs, some other companies in the area as well. At some point, you’de think this would catch up with amazon, google, etc.

  14. 14
    Cap''n says:

    I find it instructive to think about significant downturns in price, which we are not seeing yet in Seattle this cycle, in terms of where you end up. Our YOY could plunge a dramatic 60 percent from the current rate and you would still be rising faster than inflation. Point being there is a big cushion between the current market and anything remotely looking like putting people that bought in the last 5 years underwater. I think we reach the top of relatively well-to-do affordability in close-in Seattle (roughly 950k for an average quality 3 bed 2 bath 2000 sqf. on a 3.5k lot or so) and then bump around that median for quite some time. Seattle city limits are headed to a median of close to 800k. If you plowed through every comment on this blog highlighting a stunningly over priced house in the last 4 years…it’d cost you more now. I am bullish, needless to say.

  15. 15
    reaLOL estate says:

    By Cap”n @ 14:

    I think we reach the top of relatively well-to-do affordability in close-in Seattle (roughly 950k for an average quality 3 bed 2 bath 2000 sqf. on a 3.5k lot or so) and then bump around that median for quite some time. Seattle city limits are headed to a median of close to 800k.

    $800k median? That is ~11x Seattle’s average annual household income. It seems the only way we hit 800k median is a return to massive leverage which will set us up for another spectacular bust. Who knows though, people have short memories…

  16. 16
    Cap''n says:

    If you assume average household income alone is what will be buying many of the SFH, you might have a point. But that is not what is or will continue to happen. Not foreign money? Not local investor money? Not tech dual income household? No downpayment fronted by your parents? There is always shoreline. I don’t advocate this as a good outcome. Just predict that is where we are headed. Like always. SF light.

  17. 17
    AJT says:

    RE: reaLOL estate @ 12

    Here is Redfin’s CEO supporting a turn in tech translating into softening of RE prices. He doesn’t claim a crash by any means more of a return to not absolutely bat crazy gains.
    http://www.bloomberg.com/news/videos/2016-04-26/what-a-tech-downturn-means-for-san-francisco-s-housing-market

  18. 18

    By Kmac @ 8:

    RE: Doug @ 5
    I had an appraisal done late January of this year.

    It had language in it that I found interesting.
    I’m sure they are just performing cya in case R/E turns down again, but interesting nonetheless:

    “Market Research & Analysis” section of the report:
    …………………………………………………………………………………………………………………………………………………..

    “Foreclosures have affected this sub market of the Puget Sound area, but the bigger impacts have come from the loss of jobs and restrictions on the types of loan programs and credit. The foreclosure numbers are beginning to remain constant or even a slight decline. However, this could change if the banks release a good portion of their shadow inventory of homes taken back during the past four years.”
    …………………………………………………………………………………………………………………………………………………………..

    I can’t count how many times I have heard that people claiming that the banks having “shadow inventory” is nothing but scare mongering and an over dramatization, but here we have an appraiser utilizing language that implies that it may actually be a fairly large number.

    That is just filler language, picked by the appraiser. I just checked a recent appraisal and it had no similar language, but it did have language to the effect that there’s no one method to find all distressed property data, so none of it is reliable.

    Surprisingly it checked yes on the box that foreclosure sales are affecting the market, even though only about 6.5% listings were REO within one mile. But it went on to note that those sales result in extended market times and price reductions which “contribute to inaccurate market trends that are reported in the data services.” Reminds me of back when distressed sales did have a significant effect on the median. I’m not sure 6.5% would have that significant of an effect on median.

    Anyway, different appraisers will have different opinions, but except for actual closed non-forced sales I’m not sure they have access to hard data to back up their opinions.

  19. 19

    By redmondjp @ 11:

    By Som @ 10:

    RE: Blurtman @ 9 – The ground reality is that the sellers can literally ask potential buyers to dance on the street as a show of commitment.

    And you’ll see middle aged couples dancing on the street and willing to pay $850K for the house.

    Not necessarily true. There is an upper limit, and if you set the asking price too high, not only will you not have a multiple-offer situation, you will likely have a no-offer one. Setting the listing price at the proper level is very important! You want to get several strong buyers into play, and by pricing it too high initially (even if that price could easily be exceeded in the ensuing bidding war) you can scare the buyers away (as happens on Ebay).

    I would agree with that, and it can be a fine line. There’s also a risk in pricing too low in that it could limit what people bid. I saw an example of that last year. The other risk of pricing too low is you get way too many offers to fully analyze them all, particularly if the cash offers are significantly lower, such that you need to analyze financing. I’ve seen agents brag about getting 40 offers–I’d be embarrassed that I missed my price point so badly.

  20. 20
    steve says:

    Since Redfin has been mentioned in this thread..I find the Redfin home price estimates (newish feature) to be much more accurate than Zillow estimates! Their home comps are much better.

  21. 21
    Carl says:

    RE: Doug @ 5 – I’ve always wondered how the appraisal process works and been cynical. Each time I’ve ever bought or sold a house (5 times in the past 20 years), the appraisal has always come in right at the sale price. Either the appraisers are incredibly good at their job or they are simply “encouraged” by someone to decide on the sale price as the number and then find evidence to support it. I think it is the latter. So it’s pretty apparent that the appraisers aren’t exactly objective. In fact, it seems that if you want to get additional workflow, your appraisal better not hold up a deal.

    On the other hand, it also seems to me that in 99.9% of the time, real estate sales are arms length transactions between a willing buyer and a willing seller. Isn’t it the definition then of “fair market value” what the agreed upon price was? So why even need an appraisal other than for the banks to cover their ass?

    And as an aside, why is title insurance so expensive on re-finances? Seems like a simple check for any intervening recordations on the property would suffice.

  22. 22
    sleepless says:

    By Som @ 10:

    RE: Blurtman @ 9 – The ground reality is that the sellers can literally ask potential buyers to dance on the street as a show of commitment.

    And you’ll see middle aged couples dancing on the street and willing to pay $850K for the house.

    Yup, no bubble here…

  23. 23
    Blake says:

    Woo hoo… we all may be in for some free cash from the Fed!!!!
    Yes, “helicopter money” appears to be the last resort of our esteemed financial planners at the top:
    http://www.reuters.com/article/us-funds-doubleline-idUSKCN0XN2LF
    “Gundlach suggested that a “helicopter money” drop could be the government’s next big monetary and fiscal move to stimulate the U.S. economy. “Helicopter money is going to happen,” he said.

    He was referring to an idea made popular by U.S. economist Milton Friedman in 1969, who said dropping money out of helicopters for citizens simply to pick up was a sure way to restart the economy and effectively fight deflation. Ray Dalio, founder of the world’s largest hedge fund Bridgewater Associates, echoed the same idea in February.

    Last year, Gundlach correctly predicted that oil prices would plunge, junk bonds would live up to their name and China’s slowing economy would pressure emerging markets. In 2014, Gundlach correctly forecast U.S. Treasury yields would fall, not rise as many others had expected.”

    … I doubt this helicopter $ will help the real estate market at all… but imagine how well the local pot shops are going to do!!
    Ironically, after they do this cash drop, the next move by the Fed planners would probably be to outlaw cash so they can get serious with negative interest rates and not worry about people pulling their money out of the banks (like in Japan over the last few months)… they will probably also have to outlaw private holdings of gold like they did in the early 30s: https://en.wikipedia.org/wiki/Gold_Reserve_Act
    Imagine how much President Hillary will be hated by 2018?

  24. 24
    ESS says:

    National story about remodeling with Seattle stuff in it down below! People are fixing up – not moving out and up because of the shortage of inventory. But this raises interesting questions (at least to me). Based upon the value of a house, what percentage should a homeowner spend on a particular remodel? And will a significant kitchen or bathroom remodel greater affect the value of a lower priced house, or a much bigger, more expensive house? And do you in the real estate industry have a percentage or equation that you apply in determining how much money should be spent on a particular remodel in order to get the most money out of the house in terms of value and future sales?

    http://www.marketwatch.com/story/why-move-more-homeowners-are-remodeling-instead-2016-04-27

  25. 25
    Blurtman says:

    By sleepless @ 22:

    By Som @ 10:

    RE: Blurtman @ 9 – The ground reality is that the sellers can literally ask potential buyers to dance on the street as a show of commitment.

    And you’ll see middle aged couples dancing on the street and willing to pay $850K for the house.

    Yup, no bubble here…

    Quien sabe? One view is that if lending standards are appropriately rigorous, then purchasers who buy via a mortgage should have the means to meet the monthly payment. OTOH, during the last crash, folks who could afford to pay walked away from what they viewed to be a bad investment. But what triggered that crash was unsound financing practices and criminal acts by securitizing institutions. So this time around, if folks who can pay continue to pay, and there is no glut of NINJA purchasers who cannot afford to pay, then at least that variable may be eliminated.

    I am a believer in fundamental value which is apparently an archaic concept. I don’t now what to make of the Chinese all cash buyer accept to say that it seems to be a real phenomenon currently.

  26. 26
    greg says:

    RE: Blurtman @ 25

    certainly looks real too. We see Chinese buying parties at lots of homes… Of course whether they are just doing lots of window shopping or are putting in lots of offers I have no idea.

    With Microsoft, google, apple all missing this week I am left wondering how the investment markets will react if Facebook and Amazon fail to deliver…. Could we finally see a true market correction? And if so how will that impact local RE…

    FB today Amazon tomorrow

  27. 27
  28. 28
    AJT says:

    RE: Blurtman @ 25
    ” I don’t now what to make of the Chinese all cash buyer accept to say that it seems to be a real phenomenon currently. ”
    This is my thought on Chinese nationalists purchasing homes in US or abroad for that matter and how a disruption in that channel could affect RE locally. I will use the hypothetical of a US citizen purchasing RE in China (even though that is illegal). Say said citizen has decided to diversify and purchase RE in China along with other investments in US. Now the citizen’s US investments sour or the citizen gets in trouble with the IRS (insert communist government). This could force the sale of overseas investments to cover losses, fines or a crash/low low stagflation in local economy. This is what happened to the Japanese investments in RE in the early 90’s. Would this cause our RE to crash. No, but it will free up some homes and also put pressure on the margins. Keep an eye on what is occurring in the Chinese economy and allow for a bit of a lag and see how it ripples across the Pacific.

  29. 29
    Action says:

    http://www.forbes.com/sites/wadeshepard/2016/03/30/how-people-in-china-afford-their-outrageously-expensive-homes/#3a80c4614aa5

    This article has some insight into the home buying culture in China. It’s not all money laundering as some people on here make it seem. When you don’t have access to safe investments in your home country, that’s what drives the investments in real estate abroad.

  30. 30
    Mike says:

    By reaLOL estate @ 15:

    By Cap”n @ 14:

    I think we reach the top of relatively well-to-do affordability in close-in Seattle (roughly 950k for an average quality 3 bed 2 bath 2000 sqf. on a 3.5k lot or so) and then bump around that median for quite some time. Seattle city limits are headed to a median of close to 800k.

    $800k median? That is ~11x Seattle’s average annual household income. It seems the only way we hit 800k median is a return to massive leverage which will set us up for another spectacular bust. Who knows though, people have short memories…

    If you’ve been to Ballard lately, there are thousands of 0-income households scattered under bridges, in tents, RVs and on the sidewalks. I don’t think that group is in the market for $800K homes, though many are selling right next to the camps.

  31. 31
    Timothy says:

    By reaLOL estate @ 15:

    By Cap”n @ 14:

    I think we reach the top of relatively well-to-do affordability in close-in Seattle (roughly 950k for an average quality 3 bed 2 bath 2000 sqf. on a 3.5k lot or so) and then bump around that median for quite some time. Seattle city limits are headed to a median of close to 800k.

    $800k median? That is ~11x Seattle’s average annual household income. It seems the only way we hit 800k median is a return to massive leverage which will set us up for another spectacular bust. Who knows though, people have short memories…

    RE: reaLOL estate @ 15

    A multiplier of someones income to determine affordability has never made much sense to me, as in the end all that matters is how much they need to pay per a month, which changes wildly with interest rates (which are at historical lows). At a 0 percent an 11x multiplier would be close to affordable, at our current rates I would think it would take a household income of around 100K to support a 800k price point. While naturally not all of Seattle is going to be there soon, I could certainly see several areas within Seattle supporting that, and naturally those areas would have a higher median income.

  32. 32
    reaLOL estate says:

    By Timothy @ 31:

    …at our current rates I would think it would take a household income of around 100K to support a 800k price point.

    With all due respect, this comment represents what is wrong with the current housing situation as it is a prime example of over-leveraging/math deficiency. For starters, an 8x multiplier is not prudent – never has been, never will be. However, let’s break down these numbers and explore this foolishness:

    Income
    $100,000 salary = $8,333 per month

    House Cost
    $800,000 house * 20% down = $160,000
    $800,000 – $160,000 = $640k mortgage

    Mortgage Payment
    $640,000 @ 30 years @ 3.85% = $3,000 month

    For just the mortgage payment, you would be at 36% of your gross income!Throw in property taxes and you are at 44%. Add insurance and maintenance and you are spending over half your gross income on housing. Better pray you have no other debt, like student loans. Also, good luck saving for retirement…

  33. 33
    Timothy says:

    By reaLOL estate @ 32:

    By Timothy @ 31:

    …at our current rates I would think it would take a household income of around 100K to support a 800k price point.

    With all due respect, this comment represents what is wrong with the current housing situation as it is a prime example of over-leveraging/math deficiency. For starters, an 8x multiplier is not prudent – never has been, never will be. However, let’s break down these numbers and explore this foolishness:

    Income
    $100,000 salary = $8,333 per month

    House Cost
    $800,000 house * 20% down = $160,000
    $800,000 – $160,000 = $640k mortgage

    Mortgage Payment
    $640,000 @ 30 years @ 3.85% = $3,000 month

    For just the mortgage payment, you would be at 36% of your gross income!Throw in property taxes and you are at 44%. Add insurance and maintenance and you are spending over half your gross income on housing. Better pray you have no other debt, like student loans. Also, good luck saving for retirement…

    RE: reaLOL estate @ 32

    There’s 3 important things to realize: 1) The 800k number would reflect an increase in land value, not home replacement value. This means home owners insurance shouldn’t go up (around $1k per year). 2) The local property tax system is such that an increase in median home price does not mean greater taxes, as long as everyone’s home value is also going up. So let’s peg this at $4k for our calculation. 3) conventional loans can be around 3.5 – 3.6% right now, and if this was actually the median price of houses I’m sure the standards would be updated to allow for 800K in Seattle (if it’s not already the case).

    So with these assumption the total monthly payment would be $3,290 meaning it would clearly be affordable to someone making 3290*3*12: or just $118,440 (still within what I would consider a possible median income for select neighborhoods within Seattle). Then, if you include the tax incentives for somebody at this income bracket (interest + you don’t pay tax on property tax obviously) you would get to around $105K. While maybe slightly over leveraged, it’s not as insane as you make it sound.

  34. 34
    Scotsman says:

    Meanwhile, down in San Francisco prices have doubled in four years to $1.2 million, a price only 11% of the population can afford. Yet the trend continues… http://www.doctorhousingbubble.com/san-francisco-real-estate-bubble-peak-affordable-to-only-11-percent-of-households/

  35. 35
    Yaj says:

    “So with these assumption the total monthly payment would be $3,290 meaning it would clearly be affordable to someone making 3290*3*12: or just $118,440 (still within what I would consider a possible median income for select neighborhoods within Seattle). Then, if you include the tax incentives for somebody at this income bracket (interest + you don’t pay tax on property tax obviously) you would get to around $105K. While maybe slightly over leveraged, it’s not as insane as you make it sound.”

    I’d be interested in seeing you flesh out the rest of that household budget in a bit more detail.

    In my experience at 2X gross you can live comfortably, save for retirement, maintain a 6 month emergency fund, take vacations. Just doing the hypothetical math for us at 3X gross, quite a bit of that margin is gone, and higher ratios look like financial suicide.

  36. 36
    Justme says:

    >>In my experience at 2X gross you can live comfortably,

    I think mean gross=2X, not “2X gross”, with X being the housing payment/exepense amount.

    Anyway, gross=2*payment works for as little while until a few people loses their jobs. Then the SHTF.

  37. 37
    Action says:

    Looking at average prices as a multiple of income is a pointless metric in this market now due to the shortage of inventory. We’ve been in a deficit of construction of new supply compared to population growth since 2009 and construction is still not keeping up with demand, let alone exceeding demand to make up for the shortage of inventory caused by the recession.

    It’s going to become a smaller and smaller percentage of people who can afford to own in the Seattle area. So average income does not matter. Looking at the income growth of the top 10% over time might be a better indicator of pricing.

  38. 38

    By Action @ 37:

    Looking at average prices as a multiple of income is a pointless metric. . …

    You could have stopped there! ;-)

  39. 39
    Justme says:

    By Kary L. Krismer @ 38:

    By Action @ 37:

    Looking at average prices as a multiple of income is a pointless metric. . …

    You could have stopped there! ;-)

    It is different this time !!

  40. 40
    Steve says:

    FaceBook just blew out earnings this morning and ….Amazon just blew out earnings later…up 12% –
    sky not falling yet..

    long tech, long tech hubs/ real estate, especially urban western cities..

  41. 41
    Marc says:

    By Carl @ 21:

    RE: Doug @ 5 On the other hand, it also seems to me that in 99.9% of the time, real estate sales are arms length transactions between a willing buyer and a willing seller. Isn’t it the definition then of “fair market value” what the agreed upon price was? So why even need an appraisal other than for the banks to cover their ass?

    And as an aside, why is title insurance so expensive on re-finances? Seems like a simple check for any intervening recordations on the property would suffice.

    Carl,

    Either you’re in the industry or particularly astute on both points. The vast majority of appraisals in a purchase money mortgage scenario will come in “at value,” i.e., the priced agreed upon by the buyer and seller. This is largely due to your point about an arm’s length transaction between a willing buyer and willing seller neither of whom are under undue pressure being the best available benchmark for “fair market value.” The appraiser in that situation is given a copy of the deal and tasked with estimating the homes value but that essentially becomes an exercise in simply seeing if relatively recent sales of nearby homes would seem to support the price the parties reached.

    There is a remarkable amount of subjectivity in an appraisal from which sales are chosen as “comps” and which are excluded, what different aspects of the property are valued at (location (good or bad), view (or lack thereof), negative external factors (next door to a dump or not), condition of the improvements, relative appeal of the improvements, finishings, etc.). 10 appraisers appraising the same house might come up with 10 different numbers or they might all hit the same number but have remarkably different rationales for how they did it.

    Contrast this with a refinance appraisal. Almost everybody complains the appraisal comes in too low when they refinance but it shouldn’t be surprising. In those scenarios the appraiser was not given a target to hit and the bow and arrow to hit it with. Instead, the lender is saying “hey, this guy over here wants to borrow money from me and use his house for collateral. Go check it out and tell me how much it’s worth so I know how much to loan him.” Now, the burden is entirely on the appraiser to “set the value” and he has to put his name/reputation on it. Any rational person with that task is going to be more conservative in their estimate. Thus, refi appraisals almost always seem low and probably are. An exception to that rule is in a depreciating market when they’re probably high. That’s because the appraiser is constrained to basing his analysis on completed sales. If prices are falling, past sales will suggest a price higher than what the market will currently bear.

    As for title insurance, it is an incredible racket. If you think the 6% commission model among real estate agents should be a relic of the pre-internet era, you’re right but that has nothing on the sham that is title insurance premiums. The role of title insurance has great intrinsic value but the way it is priced does not. A handful of massive companies dominate the industry and somehow manage to maintain their fees while their costs have plummeted with the advancement of technology, global outsourcing, and the “outlawing” of kickbacks to brokerages, lenders, etc.

    Guess where their “title plant” is located? Next time in your Manila swing by and check it out.

  42. 42

    By Marc @ 40:

    Contrast this with a refinance appraisal. Almost everybody complains the appraisal comes in too low when they refinance but it shouldn’t be surprising.

    I’ve never heard anyone complain that a refinance appraisal was low (as opposed to maybe less than what they needed). Historically refinance appraisals have always been high, and although I don’t see as many refinance appraisals as I used to, I’ve seen evidence of that in the last couple of years.

    As to appraisals coming in at value, I don’t think there’s any upside to the appraiser to coming in at a higher value, so they don’t.

  43. 43

    By Carl @ 21:

    And as an aside, why is title insurance so expensive on re-finances? Seems like a simple check for any intervening recordations on the property would suffice.

    Sorry, I missed this question until Marc quoted it. Marc is right that title insurance company profits are rather high (or at least they were the last time I looked into it). But you’re wrong that a simple check for recordations would suffice. For example:

    1. Anything that records a minute before you would win out. Title insurance covers that.
    2. Related to that concern, there isn’t just one place you have to check for adverse interests. For example, you would also need to check the local Superior Court, Federal District Court, and the bankruptcy court if it’s in the same county as the property (although some of those might not be effective until the next morning).
    3. It may not be 100% certain that an item is not a lien–judgment liens are the best example, particularly for people with common names.
    4. Some interests can even be recorded after the fact–contractor liens would be the best example of that. I once saw an example of that where a company did over $100,000 of engineering work in preparation to plat a large parcel of land. The title insurance company ended up having to pay that claim, even though they had not made any errors in their searching.
    5. With surprising frequency the auditor will mis-record a document, so it won’t be found just doing a simple check (but I think the title companies are fairly good picking them up).
    6. Title insurance covers some things that are not recorded at all, although those are usually with a deductible and limited coverage. For example, removing or moving a fence or building that encroaches on a property line or violates HOA rules.
    7. Some things continue from old deeds. For example I recently saw a property that had a 1944 deed which prohibited swine and cattle on the property. Probably not a big deal today in that area, but you never know what the restrictions might be until you see them. Easements are another example of something that continues forward.
    8. For the most part, the coverage continues after you sell, which can be important because when you sell you will most likely provide a warranty deed.

    Title insurance on a $500,000 transaction is about $1,500. Given the fact that if you were going to check title yourself you’d technically need to go all the way back to the first sale from a government entity, that’s pretty cheap. I did have a court case once where an attorney did the title research himself and I really wondered why. His bill to do that had to exceed the cost of a policy, and if he made a mistake he would have been subject to a malpractice claim.

  44. 44
    Marc says:

    Kary,

    That is quite the opposite of my experience. In my 10 years of practice. which admittedly isn’t that long, I can’t recall anyone ever saying their refi appraisal was high. I’m quite sure that would have stuck out in my mind because all I’ve ever heard was that it was too low either because it was lower than what they thought the home was worth or lower than what they needed to get the refinance at all or desirable terms.

  45. 45

    RE: Marc @ 43 – My sample the last few years has been small compared to what I used to see. So maybe it’s inaccurate. I was surprised at what I did see though, because the appraisals were from after the period where regular lenders didn’t control who the appraiser was.

  46. 46
    Yi says:

    RE: ess @ 27
    I work in a bank and I deal with Chinese all the time . in fact I feel like I’m in China during my 8 hrs of work.

    Anyways the real reason why investors are moving money here is becsuse the government is really cracking down on corruption over there. Cash buyers are all students / movers who are here to move money. They’re not on F1 visa to study.. They’re here to be an excuse so their folks can move fund here. If cash stays in bank , theyd rather buy empty property than keeping in the bank for 0.01% interest.

    Anyways I still see lots of potential for money to be moved here. I’d sell if I see ppl stop the funding. It’s still coming.. Everyday and it’s scary.

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