DOES AN APPRAISAL DETERMINE VALUE?

I have clients right now who are somewhat infatuated with a unique, overly-improved home in a working class north metro area which is priced about $60,000 over anything around it.  It’s a 1960 ranch home in a neighborhood of ranch homes where the owners “popped the top”, adding a second story loft that really is very cool.  The second story living area adds about 700 square feet of living space, comprised mostly of a large master suite with a private retreat and sitting area.

It is, undeniably, hip  It is also, undeniably, risky to buy something that is $60,000 more expensive than any other home on your street.

There is always vulnerability in buying off the top shelf in a neighborhood.  The biggest reason for this is that your neighbors can do a lot more to negatively impact your value than you can do to bring your value up.  And because the most expensive home on the street is usually in pretty good shape, you’re limited in the number of improvements you can make to increase its value. 

Conversely, when you buy the smallest home in a neighborhood, or the most run-down home in a neighborhood, you are in control of raising the value up to the neighborhood standard.  You can remodel, re-landscape, add new windows… there are a host of improvements that you can make that will immediately launch the value forward. 

In this particular case, the home in question has been on the market for over four months.  It is currently listed for $300,000, when others in the area have recently sold between $220,000 and $245,000. 

I have communicated to the listing agent that, while it’s a nice home, my clients simply aren’t comfortable buying a Mercedes in a neighborhood of Hyundais. 

In response to the same feedback over and over, the seller recently hired an appraiser to value his home.  The valuation from the appraiser - $315,000.  Which leads to the question, if an appraiser says something is worth $315,000, but nobody will touch it for $300,000, what’s wrong?

It comes back to understanding what “value” is in a given market.  Value is not determined by an appraiser.  Value is determined by what a ready, willing and able buyer will pay in an arm’s length transaction.

An appraisal is an opinion of value, supported by factual data.  But it is not the same thing as an offer to purchase from a ready, willing and able buyer.

I have another client who called me this week to talk about the value of her home.  Recent sales of similar floorplans had shown what appeared to be a marked surge in value in her neighborhood. 

And while her home’s value has gone up, and the floorplan is essentially the same as the two high-priced sales on her street, her home simply is not the same as either of the two which broke the mold.  The improved homes both started with tremendous lots offering open space views.  They each had newer windows, fresh paint, new carpet, and remodeled kitchens.  One had an extraordinary finished basement, and the other was exquisitely landscaped. 

While an appraiser might look at the “model match” sales and make some adjustments for condition, location and improvements, the reality is that while many buyers will lunge at a show-ready home, most will swerve away from a deferred maintenance home, even if it is reasonably priced. 

The point is… an appraisal is not the same thing as a purchase offer from a ready, willing and able buyer.  You must be careful with appraisals and appraised values, because buying a home has an emotional component that is simply at odds with an appraiser’s factual analysis. 

Sometimes that emotion is positive, and it drives the price higher.  Sometimes that emotion is negative, and it will pull the value down.  A good real estate broker (and a good stager, for that matter) can help you play to these emotional components and make them work for you instead of against you.

Appraisals provide important objective data which is worthy of consideration when determining the value of a home.  But pricing is an art, not a science.  How a home is presented to the market can add, or subtract, thousands of dollars to or from its value.

Appraisals do not determine value.  Buyers determine value.  And so it is incredibly important to get in tune with what buyers want when it comes to pricing and presenting your home to the market. 

ONCE AGAIN, FED TAKES THE EASY WAY OUT

Stocks soared higher this week and interest rates dropped on news that the Fed has decided to continue its Quantitative Easing (QE) policy after declaring in June that the practice would come to an end in the fall.

What is Quantitative Easing?  In short, it’s a commitment from the Federal Reserve to be the primary purchaser of mortgage-backed securities from banks and private lenders. 

What does that mean?  It means that instead of the market determining what a fair return for a mortgage backed note will be, the Fed steps in and purchases mortgages at rates that are generally lower than what the private market would demand.

The net effect is lower interest rates and a significant increase in the money supply, since the Fed is basically dumping up to $1 trillion of QE capital into the money supply each year in exchange for mortgage notes (which might explain why gold prices have gone up over $500 per ounce since QE began in 2008).

The intention is to pump up economic activity through the housing market.  It’s been going on since the stock market crash and the Great Recession of 2008.  But while the housing market has moved firmly into recovery the mode (thanks in large part to QE), the rest of the economy has not.

Many fear – myself included – that this somewhat desperate move during the recession is becoming an accepted norm in US monetary policy.  Low rates and an increase in the money supply is like pouring gasoline on a struggling, soggy campfire (except the tiny campfire, otherwise known as the post-recession US economy, is barely flaring at all).

I am very much of the belief that the post-2008 economy in the United States brings with it a series of harsh new realities.  Globalization is killing the middle class.  Under-employment is here to stay.  The government is entering into huge obligations (i.e. healthcare) that it can’t possibly support.  Higher taxes are coming.  

The only answer is a more skilled, more motivated, better trained, increasingly efficient workforce that is willing to lean into the new realities, work harder, take responsibility, and kick some butt.  (I know, I'm in fantasyland)

Unfortunately, I don's see it happening.

The Fed’s ongoing QE policy, which is understood by few, serves the purpose of making our moribund economy look at least marginally functional, when in fact, it’s not. 

I do think the Fed’s decision to engage in Quantitative Easing in 2008, 2009 and even 2010 probably saved the economy from complete collapse.  If you’re on the brink of disaster, drastic measures are sometimes necessary.  But it’s time to dial it back and accept some new realities.

Just as baseball had its steroid era, the US economy is in the midst of its QE era.  But we can’t become permanently addicted to this juice.  It’s not sustainable.  It’s gimmicky.  And if it becomes the new norm of US economic policy, we’ll surely pay an even higher price down the road.