Buyers

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%.

 

 

Decade of New Construction

Better to Buy or Build?

This question comes about in almost every new client conversation I have. There are those diehards that refuse to live in a new house, and there are those who want a maintenance free home from the start. (no such thing by the way – but new homes are certainly less). Personal tastes aside, there is always a financial question regarding which is better. It is the goal of every seller, whether builder or homeowner, to maximize their price at the sale of a home. There may be some other factors on the table regarding timing, but it all comes down to the final net price to seller. Always.

So, prices tend to go up and down in tandem for resale and new construction. Sometimes, one lags the other, but in general, when prices are rising, they are going up for both types of sellers. For that reason, the percentage of sales that are new construction tend to be pretty flat in good times and bad. I’m not saying that new homes keep selling, I’m saying that as a percentage of total sales, they remain fairly constant.

When we look at the last decade, this is certainly what we see. From 2003 to 2011, the percentage of total sales that were new construction (Albemarle and Charlottesville only) remained between 16.7% and 18.0%, and in 7 of those years, it was even tighter, between 16.6% and 17.1%. Not a lot of variance.

But in 2012, we saw a major shift. In Oct of 2011, builders began getting advance warning from their suppliers that prices were going up. Drywall, lumber, you name it… Prices went up. And we’re not talking 2% here. In 2012, prices on drywall went up roughly 30%. And in January of this year, prices went up another 20%+. 2012 saw lumber prices up 44%. And that drives new home prices up. Nationally, the average new home contains roughly 45% of it’s cost in materials. And when they go up as significantly as they have, there is little way to protect the profit without ratcheting prices up.

But good news may be on the horizon. Lumber commodity future point to as much as a 25% decline in prices from mills as China demand decreases and output from Canada increases.

So, here is the interesting thing. 2012, saw the first major drop in new construction. Builders may not have even noticed. The actual number of new homes sold in 2012 (266) was the highest in any year since 2007 (376 – so we are still a long way off the bubble path). But while there was a 4.7% increase in new construction sales in Charlottesville and Albemarle, that paled in comparison to the 15.7% increase in total sales. End result is that the percentage of homes sold in Charlottesville and Albemarle that were new construction went from 16.7% to 15.1%. (Explanation of the Graph: Blue and Green columns represent the total number of homes sold and total number of new construction homes each year. The yellow line is the ratio of new construction to total market.)

NewConstructionWhat brings this back? Two things are possible, likely a combination of the two will play out.

The first is that material prices come back down. As the lumber news points, there should be some relief from manufacturers as output increases. This won’t bring it back to par, but it will allow some relaxing of prices.

The second option is that resale homes will see a price increase. (It has been many years since I said that and it feels pretty good.) As long as resale prices remain depressed, the builder market will have a tough time competing. My bet is that 2013 sees better numbers than 2012 for new construction, but not back to the 2011 16.7%.

Product Mix

Talk to a marketer and you will hear this term frequently: “Product Mix”. It refers to the breakdown of a market and precisely what is selling. This then allows companies to focus on what to manufacture. Imagine a computer company determining whether to build desktop or laptop computers. A quick look at the product mix of what is selling allows them to divert resources to the appropriate market.

Builders operate in much the same way. The problem is that a project must go to the city or county months or years before construction begins, and that can be 6 months or more before the first buyer can occupy the residence. Therefore, there is always the risk of over building a certain type of home. Below you will see a graph by quarter from 2003 to Present for the combined Charlottesville and Albemarle markets. Each line represents a product type: Detached, Attached, and Condo.

(Click on the graph for a larger image.)
YearEndWrapUp.jpg The quickest thing most folks will notice is the enormous bump that occurred in the 1st quarter of 2005 when the first condo conversions became available to the general public. The condo market was steady until it got another bump mid year 2006 and then slowed until the end of 2008 when it hit the skids.

This is a fascinating tale of what the right project was to work on then… and not now…

Builders watched as the early developers sold their stock quickly, but trends shift, and the developers who brought condos on the market at the end of 2008 were greeted with credit issues as well as an over built market.

Contrast this with attached homes which saw a bump in prevalence just as condos were slowing. While I cannot state for sure that I know what was happening, I do have a theory here. Detached homes tend to be the priciest of the three product types. Therefore, those who may not be able to afford the 3BR/2BA home on a 1/2 acre in the county look to more affordable options. Those options tend to be condos and townhouses. When credit became impossible to get on condo projects, the attached home was the only solution.

But, take a look at the last 3 quarters where detached homes have grown in popularity even while attached homes fall off sharply. This coincides with the convergence of prices across the different product types. For the first 9 months of the year in the city, the median home price of a townhouse was $242,000. But the detached home price median in the city was only $261,000. A difference of only $19,000. That’s just over $86 month in mortgage payments on an 80% loan.

So what does product mix tell us about the future market? It says that as long as the price between detached homes and their counterparts are small, the detached homes should continue to rise as a percentage of the sales. It also reiterates that we need financing to be eased in reference to condo projects.

The City By Month

For about two years now, I have been creating reports on various neighborhoods throughout the city and subdivisions in Albemarle County. One of the things I have done is to look at homes by the price per square foot, hoping to minimize as much as possible any bias toward the product mix of homes being sold. Last year, big homes were selling, this year, it is the entry level homes that are selling. (When I can get time on my PC and do a histogram in Excel I will. Apple number crunching bites.) One of the things I haven’t done, until now, is to look at the entire city of Charlottesville as a single unit in the same manner.

At first, when I looked at this graph, I was shocked. I thought for sure the market had moved more than the graph appears to demonstrate. Then I calculated out the percentage shifts and realized that actually the market is about where most people thought. In general, pricing in the City is down. And, as known, the pricing is, at best, erratic and, at times, somewhat irrational. The most obvious part of this graph is a quick look at Days On the Market (DOM). We have known that it was going up, and this sure makes that obvious. I had originally figured that I would need to do two scales, one for DOM, and one for Price per S.F. But alas, the DOM actually exceeded the Price / S.F. at one point.

The graph below is fairly straight forward. I have pulled every detached home that has sold since January 1, 2005 in the city of Charlottesville. I then calculated the Price / S.F. for each home and then pulled the average $/SF and average DOM for every month since January, 2005. The results were then graphed.

City_Monthly.jpg When you look at the green line ($/SF) it looks fairly flat, but in reality, that is just the scale. In fact, I looked at the rise and fall over every three month period during the 05-09 years, and found 5 periods that the price showed over 10% drops during 3 months. There were also nine corresponding positive periods in which the prices rose more than 10% over a three month period. Again, erratic behavior.

But as you look at the line over time, you see the trend downward. From the peak in April, 2006 to current month, we find a price adjustment of roughly 10.5%.

I would have guessed a larger devaluation of the market overall, but if you look back three months to March, 2009 the price was showing values 38% below today’s prices. Obviously, the city has not gone up nearly 40% in three months. Instead, what you are seeing is a light month of transactions where a single deal can dramatically change the average.

So where should this line trend in the next few months? I would be surprised if we see what looks like a positive trend continue much more. I think the city has found a good number of sales in lower priced properties for the entry level buyer. At the time of this writing, there are 85 properties under contract in the City. While this is not similar to 2005, it is a fair number of transactions occurring.

I have addressed this numerous times in other posts, but I continue to shout it, because it matters so much: The big “What If” for the city is the unemployment rate. We are still at the top of the state for our numbers, but the rates are no longer as good as they once were. We are way up. The most recent Bureau of Labor Statistics shows Charlottesville as the healthiest MSA in the state with civilian unemployment rates of 5.5%, but that is a far cry from one year ago when we were at 2.5%. This is going to play a major role at how many homebuyers are in the market. No one buys a home when they are afraid of losing all their income. So, we need to keep an eye on it. The BLS numbers project April to be lower than March, but most analysts are projecting the US rate to rise through the end of 2009.

What Homeowners Could Learn From Developers

I remember sitting in one of my development classes and wondering what my professor was talking about with land holding costs and development projects. The scenario was this: A family owned development firm buys a 50 acre tract for $500,000 and holds it for 25 years, at which time the next generation of leadership in the family wishes to develop the land. The management looks at the outstanding low purchase price of $500,000 and moves forward due to a great return on the investment. However, the land is now valued at $6,500,000. The management is thrilled that they only have to show $500,000 in land costs, and the project is great.

However, the problem is that the family may have only put $500,000 into the land, but they have $6,500,000 in the land no matter how you look at it. They could sell the land and pursue another project for $6,500,000 if they wanted to, and it would have the same actual return on the investment. You can’t look at the purchase price to determine the quality of a project. You have to look at the Value of the Property at the start time for the project.

So, what does this have to do with our homeowner today? Easy. There are folks out there that keep saying, “If you don’t NEED to sell this year, don’t!” Well, why not? Prices have retreated from their highs of 2006. That doesn’t mean that if you hold out until the market stabilizes that you will be sitting on 2006 prices. It means that if you hold out, that your prices, when they stabilize will do so at their current levels, whatever that level may be.

Is this an EASY time to sell? Absolutely not. But that doesn’t mean that you are going to get a better deal in a year. Last year I had a client who had moved away and received an offer that was less than she had hoped for on her house in Charlottesville. It was a good offer, but still not what she had hoped for. I asked her if should would buy her house as a rental property at the price she was offered. She said, “No. Why would I?” Well, because if you didn’t sell it for that, you just bought it back.

It is easier to see this analogy in stocks and bonds and other liquid assets. If you buy a stock for 50 and it slides to 35, you should ask yourself, is this the safest investment moving forward, not the past. If you can find a better asset, you should go sell the stock and buy the better assets. Likewise with your home, even if you are not making as much as you would have hoped, or even if you have lost some money, if you can find a better use for your assets, you should move them.

Ed Note: As I read this post this morning, 8 hours after stopping working and heading to bed, I realized that this post (which remains in it’s original form above) ends not the way I would have liked. To clarify: with stocks, you may move them from one to another because of the soundness of the investment or the potential gain. But with housing, the asset is more than just a financial producer, it is the center of family life, it provides for a safe haven, perhaps a launch pad for a specific school district. It has many uses. My point was that if the asset no longer performs the way you need or would like (no master bedroom on the first floor as your knees begin to give – not in the right school district as your child reaches school age – not close to a new job – not enough bedrooms with a new child on the way) then those asset changes need to be put into perspective and weighed. But the idea that because the market is not liquid or active this year prohibits a move, I think is a mistake.

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