Saturday, December 20, 2008

What's an Unfinished Attic Worth?

A reader sent this in:
"So I get these email alerts when new things pop up in certain areas within certain price ranges.

It says the seller is a licensed realtor. I checked Portland maps (which lists 964 sf as opposed to the 2,264sf on the listing) [ed - of course!] to see when it was last sold. However, there is no information listed there. I have been noticing this recently and I was wondering if you knew why it would sometimes not display the last time a house was sold (and for how much)?

It seems a mystery to me. Also, since they're clearly including the finished attic but there is no permit and pmaps indicates that it is unfinished, does that mean that all work was done without permits?"
My take on a lack of previous sale information is that the house last sold before Portland started putting all it's records online, around 2000 I believe.

If you're seriously interested in a house a Realtor should be able to dig that up for you, or you can go down to the city and look up past records.

As for the attic, I bet it was finished years ago without a permit. If it's not specifically listed as finished space then it was likely not permitted, or inspected. The work might be fine, or it might be a fire-hazard just waiting for your mega-watt hair dryer and space heater to both be plugged into the same circuit.

If it was me I would consider the attic "semi-finished" space, not worth the same value as properly-finished space, but worth a bit more than unfinished space. Assuming you don't need to rip out the entire second floor and start over. In which case it's worth LESS than unfinished space to account for extra demolition work.

When I'm comparing houses I use a basic formula to translate unfinished space into finished space, to make it easier to compare apples to apples. I assume unfinished space is equal to half the same finished space, assuming it can be finished (no 6 ft ceilings, at least for me) because it costs less to finish a basement than to add on a new wing or add another story to a house.

So for this house:

Finished space: 964 sq ft
Unfinished space: 1300 sq ft (assume all of the basement could be finished)
Calculated finished space: 1714 sq ft (964 + 1/2*1300)

Estimated price / sq ft = $325,000 / 1714 = $189.6 / sq ft

Now it's easier for me to compare different houses on the same level.

I also like to compare the averages with the stats on Trulia. I believe Trulia uses the assessor data, so to compare this house you'd use the 964 sq ft figure for an average of $337 / sq ft. WAY overpriced in my opinion, even if the house is cute (which it is).

These are a couple of tricks I use to bring the discussion back to facts and data and get past the emotional and cute factor.

Good luck with your search!


(Got a question about a house you're interested in? Send me an email and I'll let you know what I think.)

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Wednesday, December 17, 2008

The Next Wave is About to Crash

60 Minutes recently ran a piece about the next wave of loans that will soon go bad. The orange peak to the left above above are the subprime mortages that have reset recently and forced many into bankruptcy.

The greenish peak to the right are the Alt-A and Option loans that are starting to reset.

Portland has a number of these loans, which were used to buy all sorts of property, including high end property. These aren't buyer's with bad credit, but rather buyer's who bought more house that they could afford assuming they could refinance into 30 year fixed loans once their home value appreciated another 20% in a year.

Some of these loans had options that didn't pay off any of the principle, these are now starting to reset as they typically contain a clause (that most didn't read) that says that the principle must be paid down when it reached 110% of the original amount.

Other loans had low teaser rates (as low as 3% for some) that are now resetting to 6% or higher, doubling the payment.

I remember a Portland couple was featured in Money magazine last year. They had just bought a 700k house, on about $100k income, using one of these loans. (If they had used a conventional 30 year fixed at 6% their PITI would be about $3700 a month, or 44% of monthly income for someone earning $100k a year. So no they really can't afford this house) One of them was staying home to raise their child, the other worked. They had planned to refinance once the value went up, I assume now that they will be defaulting, or the second person will be going back to work soon.

It's only going to get worse here folks, and according to the recent RMLS data it is already getting worse quickly.

Click here to watch the full piece.

Thanks to Greg for the tip.

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Tuesday, December 16, 2008

Portland Market gets Fugly - 15 Months of Inventory!

The November RMLS report was released a few days ago, and it's ever worse than this pessimist expected.

Median prices are down 7% from Nov 07 to Nov 08 to $265k

The average price is down 11% from Nov 07 to Nov 08 to $308k

Closed sales are down 40% to 1041, the lowest level since Feb 1993

Months of inventory spiked almost 40% to 15 months - this might be an all time record

Total market time is now 135 days = about 4.5 months

My initial analysis says that the drop in closed sales is the result of the credit market, which isn't going to be better anytime soon. So unless people start saving more (right, anybody seen their portfolios recently?) or prices drop to the point that people don't need to borrow as much, sales will remain slow and inventory high.

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Sunday, December 7, 2008

Real Estate Brokers = Expert Advice?

Ryan Frank has an interesting piece on Happy Valley, or "Foreclosure Valley" in the Oregonian today.

One part of the story featres the Andersons, an older couple who speculated on a $600+k house in Happy Valley and lost over $100k. That sounds like less than a 20% loss until you realize that they didn't put any money down, so it's a 100% loss. At least they cut their losses, unlike lots of others out there still holding out hope for a quick rebound.

The best line of the story though was this:

"She says she should have hired her own real estate broker for expert advice. "That was our mistake. My mistake," Aloma says, hanging her head, blinking back tears."

Expert advice? The same Realtors who didn't believe Portland prices would drop? The same Realtors who only get paid on a sale, so of course it's a good time to buy!

No Aloma, your mistake was not looking at reality and realizing that growth had peaked and was declining, that the party was over. But don't beat yourself up too badly, that data was nearly impossible to find in 2006. At least today it's not.

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Thursday, December 4, 2008

Home Builder Association Annual Forecast Today!

The Home Builders Association or Metro Portland is holding its annual forecast meeting today.

I assume the intended audience is home builders and those in the trade, but the comment on the last slide of this presentation that we've hit bottom is interesting, especially as the next comment is that "pricing may still erode".

For those that are in the market for an existing, or new home, this really means that the market has not bottomed for sellers or buyers, but rather it can't get much worse for builders, as we're at a 20+ year low this month for new housing starts.

Lots of interesting data in the presentations, although without the commentary it's hard to know what they're trying to show in each slide. Other than "it's bad, it's really (*&%$ bad!"

But let's hit a few highlights:

Employment growth is negative
Manufacturing and construction jobs are down 5% and 10% respectively
New residential building permits are down 40% from last year
Unemployment is up
New migration to Portland is still positive
Condo inventory is over 15 months of supply
East Portland is doing better than all other Portland regions, with only 7.5 months of supply
The national homeowner vacancy rate has nearly doubled over the past few years

The presentations are interesting, but nothing really new or suprising for those following this blog.

Oh, and props to Clint for having his work poached for the presentation.

Thanks to Hallie for the link!

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4.5% Mortgage Rates?

Apparently the treasury department is weighing action to lower mortgage rates to 4.5% in an effort to jump start the housing market, with a few restrictions of course.

As I heard the proposal this morning, it would be for new loans only, not refinancing.

Would 4.5% cause anybody out there to buy now in Portland? Even knowing you'd likely lose money if you had to sell in less than 2-3 years?

Thanks to eln for the link.

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Tuesday, December 2, 2008

Portland Existing Home Prices Drop 8.6% in September - Case Shiller

The median price of existing homes in the metro Portland area fell 8.6 % year over year in September 2008 according to Case Shiller, continuing the trend that began in July 2007. This is now down 9.0% from the peak in July 2007, wiping out any gains made since March 2006.

The index also fell 1.3% from August to September. The slight month over month gains we saw over the summer have now reversed and the monthly decline is accelerating.

The chart above clearly shows that there was definitely a bubble in Portland, and it is now deflating.

Last year in one of my first posts I predicted that price appreciation would go negative before March 2008, and looking back it looks like I was right.
The chart above shows the price index, and you can clearly see the bubble forming in 2004, accelerate in 2005 and then start to slow in 2006.

Last month I predicted that prices will be down 9% by the end of the year (down from my 10% estimate a few months back).

The above chart shows Portland, Seattle, the San Francisco bay area (the other areas I consider as closest to Portland) as well as the 20-city composite index. Portland and Seattle are tracking each other nicely, still about a year behind the rest of the market. While the 20 city index has started to flatten out the San Francisco Bay area has really fallen off the cliff and continues to plummet.
This chart shows the price index for the past 8 years. I also added a line (the light grey line) that represents 5% growth starting in September 2000. You can see that the current price index is still well above the 5% growth line, indicating that we still have a ways to go before prices fall back in line with historic averages. I'm predicting prices won't be back to historic norms until late 2009, but even then if the economy is still in the toilet I wouldn't expect growth to suddenly accelerate.

This chart shows the previous bubble in the early 90's, and also shows that Portland prices had never dropped over the past 20 years. But as they say, past performance is no guarantee of future performance!

The S&P/Case-Shiller Home Price Indices measures the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan regions across the United States. These indices use the repeat sales pricing technique to measure housing markets. First developed by Karl Case and Robert Shiller, this methodology collects data on single-family home re-sales, capturing re-sold sale prices to form sale pairs. This index family consists of 20 regional indices and two composite indices as aggregates of the regions.

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