Financial Analysis

Mid Year Report

Nest has completed our 2013 Mid Year Nest Report. Download the whole report here. 2013_Q2_NR.

To summarize: The market continues a cautiously optimistic upward trajectory. Sales are up in the County and slightly down in the City. However, many believe that the City transactions have been limited only by a low inventory. In the City and Country median prices are up 4.6% and 6.4% respectively from this time last year.

Inventory is virtually identical in size to last year, producing a slightly lower months of inventory at 6.14.

3rd Quarter looks positive as contracts written in 2013 were up more than 12% in the 2nd quarter.

29.3% of homes sold in Albemarle went under contract in LESS THAN 10 DAYS.

And Nest is proud that through June 30, we were the #1 Firm in Central Virginia in volume of Buyer Representation. We helped more people than any other company find homes. And that makes us happy.

 

Home Buyers are Bond Traders

The fixed income bond market. Likely the most unsexy of all the traders on Wall Street. Also some of the most wildly paid when the bond market is on a roll. It is an area that few casual investors really want to understand. It’s boring. Buying 10 year bonds payable by Chrysler just does’t excite. And more importantly, it confuses any newbie to the debt market.

When interest rates go down, bond prices go up. When interest rates go up, bond prices go down.

Now, why do we as Realtors care? Well, on the most basic level, we care because our 30 Year Fixed Rate mortgages that drive the US housing market are set (at least theoretically) based on federal 10 year treasury notes. But I argue that every home buyer who doesn’t pay cash is gambling in the bond market without really understanding it.

What drives price of a home? Lots of things. Scarcity is top of the list. Inventory is way down across our MSA, and thus, prices are no longer falling, and in many cases even going up.

But the other factor to influence prices is affordability. And affordability is directly impacted by interest rates.

Take a family that today has $100,000 saved to put down on a house. With a 20% downpayment, this qualifies them to purchase a $500,000 home. (Let’s set aside closing costs for the purposes of this argument.) When there was a 4.0% interest rate just a few weeks ago, this would have meant a mortgage payment of $1,909 in Principal and Interest. When the interest rate hits 5.0% — and that will be soon — that same $1,909 no longer affords a mortgage of $400,000. It affords only $355,735. This is an 8.8% reduction in buying power with only a 1% move in interest rates.

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So the question then becomes why are these home buyers bond buyers. Simple. They have a specific return they have decided they need to make an investment. And likely, that return is in the form of specific home specifications. They are looking for 4 bedrooms with a minimum of 3,000 finished square feet in a specific school district. And for months they have been looking, and they have been told by their mortgage lender that they can afford $500,000. As they continue to look for homes, however, they unknowingly are becoming priced out of the market.

But, when they find that dream home, they aren’t going to decide to spend more. They aren’t going to decided to find a cheaper house. They are going to go after this one house, but demand a drop in price commensurate with their new mortgage rate. So, they are looking to cut that $500,000 house to $455,735. Will this happen each and every time? No! Will it sometimes? Depends on the seller and their motivation. But it will happen. And that will bring down comparable sales, and that will bring down the escalating prices.

I said this as the rates were coming down. People don’t buy a house based on sale price. They buy it based on the mortgage price. People didn’t mind prices going up during the interest rate decline because they still paid less, and they felt richer. Well, here comes the reverse of that.

Value of Tax Value

The City of Charlottesville released their 2013 tax assessments this week. Mailings have been sent to home owners, and the web site has been updated to reflect the changes.

Assessments cause all kinds of a ruckus. There is an erroneous perception that prices should instantly adjust to match these new numbers. Nothing could be further from the truth. Reality is, this is the City’s best effort to meet state requirements to estimate the values of the parcels in the city. No one in the assessors office would argue they are perfect. I won’t go so far as to say they are even close in many cases.

There are, however, certain times when assessments should be darn easy. Like the day a home sells. If a home sells for $745,000 after being offered on the open market, and the transaction is indeed an arms length transaction, it makes total sense that the City would be able to assess that house without really thinking about it. The value at which a seller is willing to sell and a buyer is willing to buy is $745,000. That is the definition of market value. And that’s why it’s truly bizarre to see the assessment today on this house at $381,000. (Assessing this home at 51.2% of its market value.)

From the City assessors web site:

Real Estate Assessments are required by the Codes of Virginia and the City of Charlottesville to be at 100% of fair market value.  Assessments are made each year by the City Assessor’s Office and are effective January 1.

and

As required, the City’s assessment is an estimate of fair market value as of January 1 each year, based on property sales for the previous calendar year.

The City breaks down the city into neighborhoods and then samples that neighborhood to determine what is happening price wise over the course of the year. Then, barring changes to a home, they apply a % change to all the houses in that neighborhood. There are certainly some places where there is more specific work being done, but in general, this is the practice. I pulled up a sampling of 10 homes in the neighborhood that is bounded by Rugby Road, Emmett Street, Westview Road, and Wayside Place. The tax assessments I pulled changed from -4.68% to -4.7%. You can’t tell me that is an accident. So, the question is, how accurate is this practice. I would say we can bicker about whether -4.7% is the correct amount, but in general, I agree with the practice. If my neighbor’s home goes up 5% or down 3%, it is fairly accurate to say mine did too — UNLESS one of us has done improvements or allowed our house to waste away, in which case, they certainly change at different rates.

So, I focused on this one neighborhood and pulled every house that sold in 2012 to see if the new 2013 assessments were accurate for these homes. Nine homes total ranging in sales price from $367,000 to $1,250,000. How’d they do? Mixed Bag.

  • 938 Rosser Lane – Sold for $367,500 – Assessed for $443,600 – 121% of Sale Price
  • 901 Rosser Lane – Sold for $450,000 – Assessed for $449,200 – Spot On.
  • 1865 Field Road – Sold for $469,000 – Assessed for $511,900 – 109% of Sale Price
  • 1825 Edgewood Lane – Sold for $530,000 – Assessed for $734,100 – 139% of Sale Price — (NOTE: On the market for nearly a year)
  • 1859 Wayside Place – Sold for $706,000 – Assessed for $590,000 – 84% of Sale Price
  • 1863 Wayside Place – Sold for $745,000 – Assessed for $381,600 – 51% of Sale Price
  • 920 Rosser Lane – Sold for $753,000 – Assessed for $735,000 – 98% of Sale Price
  • 1872 Edgewood Lane – Sold for 890,000 – Assessed for $778,800 – 88% of Sale Price
  • 1820 Edgewood Lane – Sold for $1,250,000 – Assessed for $993,000 – 79% of Sale Price

Don’t get me wrong, I totally respect the fact that assessing homes that the City has likely never been in is extremely hard. And I respect the fact that the city has a good process. But no one can argue that a group of nine homes that all sold in the past year, arguably the easiest homes to assess, range in values compared to their sale price from 51% to 139% all in the same neighborhood is anything close to useful, valuable, or accurate.

My point here is not to say that all assessments are bad, or that we should be challenging every one. What I want people to realize is that basing listing and offering prices on City (or County) assessments is dangerous. While it can be a guide, and certainly should be considered, it has to be a single tool of many in pricing a home. We look at comps all day long. And the price you paid four years ago for your home will affect its sale price far more than the new City assessments. Prices in the Venable neighborhood did not go down 4.7% this week with the new assessments. The only thing that changed is that the taxes these home owners will pay went down by 4.7%.

 

 

Twelve Straight

February 1. Our January stats are far from being updated. We likely won’t have complete numbers for at least another week. But I had to peak anyway. And the numbers are remarkably positive so far. Keeping in mind that in the first week after a month, sales continue to be entered, and thus numbers only improve, we still have good and happy graphs to push out there.

Jan_2013_S_and_InvAbove are the sales and inventory numbers for Feb 2011 through Jan 2013. What this marks is the first time in a long time that we have seen 12 straight months of increased year-over-year sales growth and inventory reduction. While the January chart may look like sales are slightly down, that is a graphical anomaly I blame on shading. As of today, we have one more sale in detached homes in Jan 2013 than in Jan 2012. (Small, yes… but still growth.)

Over the last twelve months, the increase in sales reflects a more than 20% increase for City and Albemarle. A shift from 1002 to 1214 sales.

Compared that with the attached home market, where the twelve months ending yesterday look promising with a total increase in sales in the City and Albemarle of  roughly 9.7%. But that doesn’t really tell the whole story. When you look at month by month movement for the last 12 months, you find only 8 periods of year-over-year growth. In general, the overall trend is positive, but the trajectory is not nearly as clear. Additionally, the attached home inventory is 5% higher than it was at this time last year, and that brought the months of inventory up by a month and a half to 13.9 months.

The condo market moved similarly to the attached home market. Total sales over the year were up 14.9%, but that reflected only 8 months of year-over-year growth. (The condo market, however, is very small and thus new projects, lower prices on existing projects, etc… can sway the numbers months to month greatly.)

As a final quick note, Contract Written. In Jan 2011, we saw 71 contracts written on detached homes. In 2012, that number jumped to 102. This past month, we have records of 98 thus far. This is a big jump. The reason for this is that the way in which our MLS keeps records, many properties are Contingent for more than 2 weeks before they are moved to the Pending status. It is not until that time that they get a Contract Written Date that we can track. If you figure the average closing is 45 days, and 15 of those days are not accounted for, that is as much as 30% of deals. So, it is possibile that our 98 may go up to 120-130 before all is said an done. Of course it could go up to only 110… we can’t know. There are currently 126 properties under contract that do not have Contract Written dates. Not all from January to be sure.

No matter how you look at it, our numbers are still looking very strong, and the anecdotal evidence seen by real estate professionals supports that this is not likely to change in the short run.

2012 Year End Report

NestReportLogo

 

We released our 2012 Year End Report today, and it is a very different report from the past. The format will look familiar but the content seems almost opposite from the past.

Since 2009 when we first formed Nest and started putting out the region’s most complete and authoritative study of the market, we have looked at the Charlottesville area market with cautious optimism at best, and in many cases very clear concern for our future pricing. For the first time, we are very comfortable stating that all of our indicators are positive. Across almost every product type in almost every geographic part of our area, we are seeing growth: Growth in sales, Growth in Median Prices, Drops in Inventory, Drops in Days on Market. You name it, things look good.

We have said since 2009 that we wouldn’t feel comfortable until was saw 18 months of growth. Well, guess what? For 6 straight quarters, we have seen year-over-year growth in sales numbers.

SalesByQtr

 

This graph shows the total number of sales in Charlottesville City and Albemarle County going back to 2002. But the graph is for a full trailing 12 months, not individual quarters. It allows us to see the sales patterns while removing the seasonality of quarter-to-quarter changes. When you look at it on a visual basis, the trend becomes incredibly obvious. Here’s to a great 2013. Follow the link above and check out our whole report.

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