New England Market Outlook

The housing market across the country, and especially in Boston and New England, is experiencing a growth trend that’s accelerated over the last few years. The median home and condo prices in the U.S. have dramatically risen, reaching a record high in early 2019. Despite the continued appreciation, both real estate economists and the general public are starting to worry about the shadow of a second recession (the dramatic downturn of 2007 still on their minds). With this apprehension in mind, we’ll discuss some of the things to expect from the housing market in the second half of 2019, going into 2020.

 

The Housing Market Is Going Strong… for Now

The year 2019 started with a bang, and this wasn’t even news. Ever since 2012, home prices have been on the rise, reaching unprecedented numbers in some markets. The Greater Boston Area is a good example: in March 2019, the median price for single-family homes hit a record-breaking $377,000. According to the latest CoreLogic HPI Forecast released in May 2019, home prices have increased by 3.7% year over year from March 2018. This trend may continue into the next year with home prices expected to increase by 4.8% on a year-over-year basis from March 2019 to March 2020. Also, the Case Shiller Home Price Index in the United States reached an all-time high of 215.68 Index Points in April of 2019.

There are several other encouraging factors. One of them is the arrival of a new pool of homebuyers (the Millennial generation) on the housing market. Despite their reputation for refusing to settle down, Millennials⁠—compared to older generations⁠—account for the greatest share of primary home loan originations. This number should continue to increase as more and more members of this age group reach their prime home-buying years. Low interest rates continue to support strong demand, and experts anticipate these rates will remain low for the foreseeable future.

After estimating in late 2018 that 30-year mortgage rates could reach 5.1% for 2019, Freddie Mac revised this estimate down to 4.3% and projects it will remain low in 2020 at 4.5%. Finally, unemployment rates are minimal as well at 3.7% in June 2019, a minor increase from a 49-year low of 3.6% in the previous month.

 

Housing Market Growth May Be Slowing Down

The housing market is starting to show signs that the unbridled growth of the past few years may be coming to an end. This will be a relief for aspiring buyers burdened by dwindling inventory, high prices, and competition, particularly in hot markets like the Bay Area and Greater Boston.

The number of listings available on the market has progressively improved in recent months across the country, with unsold inventory reaching a 4.3-month supply at the current sale pace. This is an improvement from the 4.2 months of supply of the previous month, but still a long way shy of the six months’ supply required in a balanced market. Although house prices remain on the rise, they are increasing at a slower pace than they have in recent years.

This gradual upturn in the quantity of available housing does not necessarily mean that new buyers will find suitable housing wherever they want, as affordability remains a major concern in many markets. The San Francisco Bay Area, Seattle, Los Angeles, San Diego, and Boston are still out of reach for most buyers despite an increase in inventory and a reduced number of bidding wars. The rise in stock is not always due to the appearance of new listings, but also the result of properties sitting on the market. In New England, the increase in the number of listings—especially in the single-family home market—is barely keeping up with the demand boosted by favorable mortgage interest rates. The best-faring markets in this area are the ones that remain relatively affordable for most buyers, notably Rochester, NY.

 

Rising Prices and Diminishing Affordability

The real estate market is by nature cyclic and it is clear that the housing market will not maintain this pace in the long term. As a result, economists and homeowners are wondering how sustainable the current housing trend is, with numerous experts pointing to 2020 as the onset of the next recession.

In many cities across the country, housing prices are back to (if not above) their pre-2008 levels, and potential buyers are struggling to secure reasonably priced housing. This affordability issue is a key reason many industry stakeholders believe the real estate market is due for a correction, particularly in inflated markets.

It is unlikely that we will see a real estate crash comparable to the one we experienced a decade ago. Firstly, lending requirements (which were one of the critical factors of the 2008 financial crisis) are very different today. Also, the market’s key players are continually learning from past mistakes; banks now apply strict standards to select potential borrowers. Appraisers who reported feeling pressured by lending institutions in 2007 have been working towards establishing appraiser independence and higher education requirements to improve industry standards.

 

Should You Be Worried About the Housing Forecast?

Trends indicate that the market will slow down in the short term–to the relief of home buyers dealing with the listing shortage and high prices. However, the chances for a 2008-like real estate crisis are remote. If an economic crisis takes place, it will most likely be due to political and financial factors rather than the state of the housing market.

Where do you think we’re headed?

Please leave a comment with your thoughts and questions:

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Green Solar Panel Appraisals Boston Massachusetts

From eliminating disposable straws to banning single-use plastic bags, reducing human impact on the environment is at the forefront of many citizens’ minds in recent years. As a result, the real estate industry is progressively adopting ecology-minded trends, resulting in the gradual emergence of green buildings (both commercial and residential) across the country. Green buildings are defined as properties that use renewable energy and efficient building materials in their operation, construction, and design to create positive impacts on human and environmental health. One of the key technologies that embody this growing shift towards sustainability is Photo Voltaic (PV), otherwise known as solar panels. Although we can rejoice that the green building movement is becoming more mainstream, the question of whether or not this energy source and other green features add value to a property is still up in the air.

Property owners are often surprised when the time comes to estimate the fair market value of their green building. Many appraisers believe that these green features, although expensive, add little value to the property, while potential buyers find these features appealing and valuable. This dichotomy between the perceived value of the property and the one reflected in the appraisal can lead to many issues when selling or refinancing. Let’s explore how solar panels and other green features add value to real property.

Solar Panels and Other Green Features Are a Good Investment

The good news for owners of green buildings is that several studies demonstrate that they tend to sell for more than the average property. In the residential world, a 2015 report from the Lawrence Berkeley National Laboratory concludes that houses equipped with solar panels sell for $14,329 more on average than a non-solar comparable property, which represents a 3.74% increase. Other recent reports support these findings, with green homes selling, on average, for 2.19% to over 8% more than traditional buildings, depending on the property’s features and location.

Given the significant investment that these features represent, particularly if they are added once the building is already built, the previously mentioned numbers seem low. However, the most compelling argument for installing solar panels or other eco-conscious elements in a building remains that they pay for themselves in the long run, as the owners save money every month on their energy bill. For commercial buildings, green features like solar panels can significantly decrease their operating expenses. Additionally, tax credits for commercial and residential buildings are an added incentive for those who install energy-efficient products or renewable energy systems in their property. Finally, as technology progresses, these elements will become not only more efficient but also more affordable.

With analysts predicting that energy prices will continue rising in the coming years, it is likely that green features, such as photo voltaic, will become more widespread and something that buyers will demand and be willing to pay more money for.

The Other Side of the Coin: The Appraisal Process Doesn’t Always Reflect the Contributed Value of Green Features

Sometimes, appraisals do not reflect the perceived value of these improvements, to the dismay of building owners.

This is due in part to the fact that, to establish the market value of a property, appraisers must present in their report comparables with similar features to support the opinion of value. Although green buildings are becoming more popular in some markets, often at the initiative of the state—for example, California’s goal is to have 33% renewable energy by 2020 and 50% renewable by 2030—they are still scarce in many parts of the country. In the absence of green comparables, appraisers have little evidence to conclude that solar panels and other features add value to a building.

To objectively derive the additional value that solar panels contribute the property, appraisers turn to the discounted cash flow (DCF) method. DCF consider the present value of the future cash flows (or savings) that the array will generate over a given period of time.

While DCF is useful, some appraisers lack the specialized training needed to fully consider the value of these features. They have little incentive to educate themselves on the subject, especially if green buildings are not prevalent in their area and if the chances that they will need to value one are slim. Appraisers specializing in green buildings exist, but they can be few and far between in geographic areas where green technologies have yet to catch up.

Finally, with the constant changes in technology, the information required by an appraiser to evaluate the added value of each feature accurately is not always available. Some features are not visible to the untrained eye, and unless the owner informs the appraiser of which elements are present on the property and their characteristics, he or she may easily miss them.

Keeping Up with Green Trends: Appraisers Are Catching Up Quickly

Nevertheless, with more green buildings constructed, bought and sold every day, the issue of finding appropriate comparables will diminish over time. Moreover, the appraising community is making a conscious effort to catch up with these trends. Companies are offering specialized training to educate appraisers on the different features to take into consideration when valuing a building and how to incorporate them in an appraisal.

The Appraisal Institute (AI), which is the largest professional association of real estate appraisers in the United States, released “The Residential Green and Energy Efficient Addendum” in 2011 (updated in 2017) to help appraisers communicate the green features of a property transparently and efficiently in the appraisers’ reports. AI is also at the forefront of green building education for appraisers with its Valuation of Sustainable Buildings Professional Development Program.

How can building owners ensure that green features are reviewed in an appraisal?

Appraising a new feature is always a challenge, and it can take time for the perceived value to be reflected in the appraisal, based on sales comparison. Builders, homeowners, and real estate agents should prepare to provide the appraiser with all the documentation necessary to identify the characteristics of each green feature and prove that these features contribute to the value of the property by saving money every month. Detailed technical specifications, HERS rating, comparative energy bills, etc., help the appraiser to support the added value for each high-performing and energy-efficient element.

Have you encountered a situation where a building’s features were not reflected in an appraisal? How was the situation resolved?

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Given the growth of the real estate market and gradual stabilization of values as we approach the top of the market, it’s more important than ever to evaluate the equity position in our portfolios and make educated and informed decisions to keep holding or pursue an exit strategy. Appraisal plays a critical role in the investment process and can lend considerable insight to your approach.

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Since 2015, legislative officials of Boston have been developing legislation concerning residential evictions in the city. Even though that legislation has failed to advance in the Massachusetts legislature, its proponents continue to work on a revised version for 2019. Residential real estate values are likely to be affected whether or not the bill is ultimately enacted into law.

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The demand for all types of real estate in New England reflects region-wide economic factors. While the national economy influences geographical real estate values, some 2019 trends unique to New England are especially important to buyers and investors. These trends include labor characteristics, financial considerations, and population behavior.

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What is the process when private real estate is needed for public projects? ‘Eminent domain’ is the label frequently used to describe that process, and its basis lies in the U.S. Constitution. All U.S. states, including Massachusetts, have their respective statutes regarding the state taking private real property. Although eminent domain’s application has expanded in recent decades, it is now a contentious issue in many regions. This latest controversy means appraisers currently have a critical role in the eminent domain field, working for private property owners and public entities. When eminent domain plays a part in an appraisal assignment, both the appraiser and client need to be aware of the unique requirements of this kind of practice.

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The digital age has disrupted many traditional businesses. Ridesharing has upset the taxi business; online marketplaces have, to a large extent, replaced newspaper classified ads. Residential real estate markets are flexing to accommodate fast-growing short-term rental companies such as Airbnb and VRBO. Owner-occupied homes now have the potential for limited rentals; houses purchased for investment may have alternative rental opportunities. Well-informed and competent real estate appraisers account for this new rental model in their residential appraisals.

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If you’re involved in the mortgage business, you may be feeling the recent industry concern regarding the fall in mortgage volume. While volume has made some small rebounds in September, the overall trend is toward a decline with a year-over-year drop in volume of 18%, and 39% for refinances.

Interestingly, according to MortgageOrb, the refinance share of the mortgage market increased to 32%, up from 29% in July. What does that say? We can only speculate that it might mean purchase mortgages may be declining in volume faster than refinance loans (contrary to the prior YoY figure) and/or the September bump in volume was enough to increase REFI marketshare.

Why has refinance volume and purchase mortgage activity declined? There’s no simpler explanation than rising interest rates and the resulting decline in demand due to rising financing costs. According to Freddie Mac, rates are anticipated to rise to over 5% by year end. Other factors include limited housing inventories and bearish investment due to the rising cost of capital and advancement in the market growth cycle.

According to CNBC, the majority of homeowners in the US have existing loans with rates below 4%. Considering this, we can hypothesize that the still limited need for refinance is even less due do the high refinance rates of the recent past that have already served/saturated the majority share of the refinancing market.

This situation is further complicated by the fact that rising rates are deterring homeowners from pursuing refinancing to take cash out or finance renovations. Borrowers are turning to second mortgages and home equity lines of credit to get the funds they need and to avoid refinancing into a higher interest rate on the full balance of their first loans.

So what does all this mean for the mortgage business and the future of REFIs? These cycles are typical and this time around, it’s not likely to be as severe due to consumer protection legislation, such as the Dodd-Frank Act, passed since the Great Recession. Additionally, many of the volatile market conditions such as the excesses in subprime lending and availability of credit aren’t present today to the extreme and detrimental degree as in the period leading up to 2007.

We’ll likely experience continuing rate increases, interspersed with brief periods of cessation where rates decrease slightly and REFI volume makes a short-term rebound. Once the economy cools in the next few years, the FED will cut interest rates and we’ll experience new growth in mortgage lending, especially refinances.

If you’d like to talk with the team and I about what’s happening with the economy and local market, please give us a call or hit the chat button to the right. Btw, that’s not a chat-bot, it’s actually us.

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One of the toughest things in the process of buying a property for investment is determining how much the property is worth now and what it could be valued at if fully repaired for lease or resale.

Which is more difficult to determine, as-is or as-repaired (also called ARV or After Repair Value)? You might think that estimating the as-is value is the easier task, but it’s somewhat more complicated than assessing the ARV.

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