Theories On Why Home Prices Are Depreciating

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Price appreciation and depreciation varies widely between top 10 metros

Recent market reports are showing strong median home price appreciation from this past spring, but according to a report by Weiss Residential Research, price appreciation is uneven and nearly half of homes in ten of the nation’s largest markets actually lost value in May. When analyzing on a house-by-house basis, about one-third fewer homes in the largest markets increased in value during the spring buying season compared to the last spring buying season.

What’s driving this latest downward trend? Are we seeing price declines because of low-value appraisals as a result of more ultraconservative appraisals?

While it’s well known that the most recent housing crisis and its high foreclosure aftermath was a causal factor in price depreciation throughout much of the U.S. With the crisis behind us, prices rose in many markets, only to start retreating.

In a PEMCO Limited article about low-value appraisals, Collateral Underwriter, Fannie Mae and Freddie Mac’s appraisal review software has been cited as an indirect cause of appraisers increasingly valuing homes lower.

“Home-owners and appraisers don’t always agree on valuations and while this topic has been coming up significantly more in the first quarter of 2015, this ‘age-old’ issue may have another explanation as to why there’s been an increase lately: Fannie Mae’s Collateral Underwriter (CU). Valins posits that although CU may not be a direct cause of low appraisals, it correlated with the issue. Miller believes that appraisers are being ultra conservative as CU came online January 26, fearing backlash from AMCs.”

In the ten largest markets, 81 percent of homes appreciated in May 2014, compared to only 54 percent appreciating in May 2015. Even in Denver, the hottest housing market in the nation, appreciation dropped from May 2014’s 95 percent to May 2015’s 84 percent. While in the weakest housing market, Washington, D.C., only 34 percent of the houses gained value in May 2014, compared to 57 percent in May 2014.

“Don’t be fooled by averages,” said Allan Weiss, founder and CEO of Weiss Residential Research. “All of the largest metro indexes are rising more slowly than they were a year ago, though market reports give the impression that values are rising across the board. However people don’t own the entire market, they own one house.”

Larger homes are not appreciating as much as smaller homes with two bedrooms or less. In booming Denver, larger homes appreciated 5.8 percent on a year-over-year (YOY) basis in May, compared to smaller homes. In Washington, D.C., larger homes declined 0.7 percent compared to a decline of 0.2 percent with smaller homes YOY.

According to Case-Shiller, metro Washington, D.C. saw an overall median price increase of 1.2 percent in the past year, this overall increase is low because 60 percent of the houses appreciated, but 40 percent declined.

“The same pattern occurred before the great housing meltdown 10 years ago. The percent of houses rising in D.C. declined from 100% to 60% while the metro index showed a slowdown but did not go negative. Once the population of houses that had been rising fell below 50%, the index began its descent,” Weiss said.

“Today, conditions at the local level may not be as positive as national reports indicate. Every house is unique, has a unique value and responds differently to market changes. In today’s market, sellers should price their homes very carefully and research local conditions to avoid overpricing that could lead to an extended time on market in case prices do decline,” Weiss said.

In the PEMCO Limited article, comparables selection is also singled out:

“Timothy Baron, a licensed loan originator with NOVA Home Loans echoes this sentiment, my personal opinion, he said, is that appraisers are being overly conservative in choosing comps because of CU.  If CU questions the comps, adjustments, etc., the appraiser would have to do a lot of extra work to justify them.  I had anticipated that CU would cause delays because of this extra work, but it seems that appraisers are one step ahead and are being ultra conservative, thus avoiding the extra work in the first place.  I haven’t spoken to an appraiser about it, this is just my interpretation of what I am seeing.”

Sellers learn and adjust to current market?

Are some of the price depreciations a result of sellers following more of their real estate agents’ advice to research market sales prices versus list price before setting a list price? With an increase in low-value appraisals, are more enlightened sellers merely matching their listing price with the low-value appraisal valuations?

Not all homes appreciate at all times?

Robert Shiller, leading housing expert and Nobel Laureate, wrote in the New York Times that “Real home prices should decline with time, except to the extent that households shell out some money and plow back some of their incomes into maintenance and improvements, because homes wear out and go out of style.”

According to Shiller, a real home price is the price after inflation is factored in. Between 1890 and 1990, inflation-adjusted home prices increased on average 0.2 percent per year. Is home appreciation and depreciation just a natural part of the dynamics between inflation, location, demand, and time?

What do you think?



HousingWire. Weiss Residential: Here’s where the next housing crash will start

Home Buying Institute. What Happens With a Low Mortgage Appraisal on a Home?

PEMCO Limited. Low Valuations is a Hot Topic with Lenders in 2015

Money for the Rest of Us. MNY043: What Drives Home Prices





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