THE COST OF CONSTRUCTION COMPARISON

How can a buyer be certain the price they are paying for a home is a good value? One good way is to compare the cost of the existing home the buyer is considering to the cost to purchase a similar home that is brand new. If the price they are paying is significantly lower than the cost of a comparable new home, the buyer is probably getting a bargain.

Why is this true? Because there are never enough existing homes to meet the growing number of households being added to the economy. People must live somewhere, so new units must be constructed for either rental or primary use. New construction has been drastically reduced over the past several years because the recession has reduced demand and distressed property sales have crushed housing prices. It doesn’t make sense for a builder to build if they can’t turn a profit. The failure to add more units to the housing market will eventually create a shortage of homes available for sale and prices will once again rise. Materials and labor costs are also at rock bottom prices and are likely to increase soon.

 All of this means a home purchase today is likely to be a good investment. The limited increase in supply will cause home prices to increase even if the economy doesn’t recover. Rental rates will also rise because supply won’t meet the growing demand caused by population increases and a lack of new construction. The end result, a buyer purchasing a home today for substantially less than the cost of a similar new home is likely getting a bargain price with significant appreciation.

   How can the cost of construction be applied? Take the following steps:

1. Once the location and type of home have been identified, research the price of new homes being built that are similar in location and amenities.
   
   
2. Calculate the cost per square foot of the new home by dividing the total cost of the new home by the living square footage. For example, a home is 3,000 square feet and is being offered on a quarter acre lot in a nice neighborhood for $300,000.00. By dividing the $300,000.00 price by 3,000 square feet, you conclude that the cost for this type of home is $100.00 per square foot.
   
   
3. Calculate the cost of an existing home by finding one in a similar location with a similar lot. Assume it would cost approximately $100.00 per square to build the home new.
   
   
1. If the size of the existing home is 3,500 square feet, the home new would cost around $350,000.00. The existing home will usually be worth a little less.
   
   
2. If the home is a few years old and the neighborhood is similar, it would be worth just a little less; say around $325,000.
   
   
3. If the existing home were being offered for $250,000 because of the economy and glut of inventory and foreclosures, the buyer could be saving $75,000 based on what the house will be worth once construction activity starts again.
   
   
4. Conclusion- The buyer is put in a position of realizing a good gain in the future.

This approach is also a great way to calculate recaptured equity, or the difference between what the house should be worth based on 5% appreciation in a typical market, versus what the house is selling for today.

Florida's home, condo sales and median prices higher in August

ORLANDO, Fla. – Sept. 21, 2011 – Sales activity and median prices for Florida’s existing home and existing condo markets rose in August, according to the latest housing data released by Florida Realtors®. Existing home sales increased 15 percent last month with a total of 16,206 homes sold statewide compared to 14,131 homes sold in August 2010, according to Florida Realtors. The statewide median sales price for existing homes last month was $137,500, up 2 percent from the year-ago figure of $134,900. August’s statewide existing home median price was also slightly higher than it was in July.

“Over the past few months, it appears that home prices have been stabilizing in many local markets across the state,” said 2011 Florida Realtors President Patricia Fitzgerald, manager broker associate with Illustrated Properties in Hobe Sound and Mariner Sands Country Club in Stuart. “This is another positive sign that the housing recovery is gaining strength.”

According to analysts with the National Association of Realtors® (NAR), sales of foreclosures and other distressed properties continue to downwardly distort the median price because they generally sell at a discount relative to traditional homes. The median is the midpoint; half the homes sold for more, half for less.

The national median sales price for existing single-family homes in August 2011 was $168,400, down 5.4 percent from a year ago, according to NAR. In California, the August statewide median resales price was $297,060; in Maryland, it was $241,564.

Fifteen of Florida’s metropolitan statistical areas (MSAs) reported higher existing home sales in August; 15 MSAs also had higher existing condo sales.

In Florida’s year-to-year comparison for condos, 7,098 units sold statewide last month compared to 6,041 units in August 2010 for an increase of 17 percent. The statewide existing condo median sales price last month was $91,100; in August 2010 it was $81,500 for a 12 percent increase. According to NAR, the national median existing condo sales price was $167,500 in August 2011.

NAR’s latest industry outlook notes that despite high affordability conditions, sales activity is underperforming, partially as a result of overly restrictive lending standards.

“Affordability conditions this year have been the most favorable on record dating back to 1970, but many buyers are being held back because banks are offering financing to only the most highly qualified borrowers, ignoring a large share of otherwise creditworthy buyers,” said NAR Chief Economist Lawrence Yun. “Those potential buyers represent the difference between an uneven recovery and a much more robust housing market that could stimulate additional economic activity and create jobs.”

According to Freddie Mac, the interest rate for a 30-year fixed-rate mortgage averaged 4.27 percent in August, down from the 4.43 percent average during the same month a year earlier. Florida Realtors’ sales figures reflect closings, which typically occur 30 to 90 days after sales contracts are written.

© 2011 Florida Realtors®

FEWER HOMEOWNERS UNDERWATER IN Q2

SEATTLE – Sept. 13, 2011 – CoreLogic released Q2 negative equity data showing that 10.9 million, or 22.5 percent, of all residential properties with a mortgage had negative home equity at the end of second quarter 2011. However, that’s down slightly from 22.7 percent in the first quarter.

An additional 2.4 million borrowers had less than five percent equity in the second quarter. The new report also shows that nearly three-quarters of homeowners in negative equity situations are also paying higher, above-market interest on their mortgages.

Negative equity, often referred to as “underwater” or “upside down,” means that borrowers owe more on their mortgages than their homes are worth. Negative equity can occur because of a decline in value, an increase in mortgage debt or a combination of both.

Data highlights

• Nevada had the highest negative equity percentage with 60 percent of all of its mortgaged properties underwater, followed by Arizona (49 percent), Florida (45 percent), Michigan (36 percent) and California (30 percent).

• The negative equity share in the hardest hit states improved. Over the past year, the average negative equity share for the top five states has declined from 41 percent to 38 percent. Nevada had the largest decline over the last year, with the negative equity share dropping from 68 percent to 60 percent, due largely to the high number of foreclosures that removed those underwater mortgages from the equation.

• Nearly 28 million outstanding mortgages that are above-market rates and could refinance to save money.

• Twenty million borrowers with positive equity – 53 percent of all above-water borrowers – have mortgage rates higher than those currently offered.

• Eight million borrowers with negative equity – nearly 75 percent of all underwater borrowers – have above market rates.

• The disparity is greater for homeowners with severe negative equity. More than 40 percent of borrowers with 125 percent or higher loan-to-value (LTV) ratios have mortgages with rates at 6 percent or above compared to only 17 percent for borrowers with positive equity.

• Since the 2005 sales peak, non-distressed sales in zip codes with low negative equity have fallen 61 percent, compared to an 83 percent sales decline in high negative equity zip codes.

“High negative equity is holding back refinancing and sales activity, and is a major impediment to the housing market recovery,” said Mark Fleming, chief economist with CoreLogic. “The hardest hit markets have improved over the last year, primarily as a result of foreclosures. But nationally, the level of mortgage debt remains high relative to home prices.”

© 2011 Florida Realtors®

RECOVERY COULD YIELD APPRECIATION GAIN

One of the most compelling reasons to buy real estate now is  the opportunity appreciation growth due to the overcorrection of real estate prices. Just as there was no valid justification for 20% annual appreciation growth in 2004 and 2005, there is also no valid reason for the excessive drop in prices we have seen in the last couple of years.

Apply The 5% Annual Appreciation Rule to determine what the value of a property should be. Housing values typically appreciate at 5% per year in normal market. Identify what the value of an investment property was prior to the boom in 2002-2003 and multiply that value by 5% every year until you reach today’s value. Compare the purchase price today with what the actual value should be. In many cases, the actual value is significantly lower giving a buyer a great investment opportunity.

For example, assume that at 5% appreciation per year a home’s value should be $350,000. Also assume this home has lost nearly half its value from the high of $500,000 and is now selling for $250,000. By deducting the $250,000 purchase price in today’s market, from the $350,000 price the home would sell for in a healthy market, a purchaser can realize $100,000 gain once the real estate market recovers. This profit is called recaptured appreciation.

The window of opportunity to recaptured appreciation has been caused from an overcorrection in prices.

Low appraisal killing a deal?

Here’s what to do
WASHINGTON – Sept. 13, 2011 – The National Association of Realtors® (NAR) reports that 16 percent of real estate professionals surveyed in June reported a cancelation in a sale, mostly due to a large number of low appraisals.

Many real estate professionals are watching deals unravel, with some appraisals coming in 10 to 20 percent – or even more – below the accepted offer.

“Over the past decade, finding ‘comps’ that accurately reflect values has been a challenge as values rose quickly during the boom and fell just as fast during the bust,” according to a recent article by RISMedia. “Discounts paid for foreclosures and short sales have created a dual price structure between ‘normal’ and distress sales.”

Obviously one of the easiest solutions when a low appraisal comes in: Ask the seller to agree to a lower price. But when that doesn’t work, consider the following tips:

Research

If clients feel the appraisal was completed incorrectly, they have the right to a copy of the appraisal from their lender, including who performed it and what comparables were used. For example, a client can find out where the appraiser is based (maybe it was an out-of-town appraiser who was unfamiliar with the area). If an out-of-town appraiser unfamiliar with the local market does the appraisal, clients can demand a new one.

Also, a client should evaluate the comparables used in the appraisal. If a client feels that the earlier home sales do not fairly compare to the home they wish to buy, they can ask their real estate agent to pull together a fairer list of recent comparable sales – or possibly even pending sales – to justify the agreed-to-sales price. That information should then be submitted to the loan’s underwriter when asking for a review of the appraisal.

Request a new appraisal

If clients feel the appraisal wasn’t done fairly or accurately, they can ask their lender for a new appraisal. A lender has the ability to override an appraisal estimate, though that’s unlikely. The lender could, however, order a new appraisal, which is more likely.

Get an independent appraisal

Clients could opt to get their own appraisal. (If the loan is an FHA loan, they should ask the lender for a list of approved appraisers.) The bank will generally review the appraisal and ask the previous appraiser if they agree or disagree with the new one. Banks may request yet another appraisal, or they could reject a private appraisal altogether. However, the first appraiser could agree with facts in the independent appraisal and return with a better price.

Source: “5 Ways to Fight a Low Appraisal,” RISMedia (Sept. 7, 2011)

© Copyright 2011 INFORMATION, INC. Bethesda, MD (301) 215-4688