Appraisers
and the Bubble
October 16, 2002
With
parts of the commercial real estate sector floundering, will housing be
soon to follow? Appraisers,
while busy with valuation for refinancings and still active purchase
markets, need to keep an eye on the health of the specific housing markets
in which they work and to take care when working in less familiar
terrains.
The
question of the moment: how much is the current residential real estate
economy driven by low interest rates?
Remember the Fed forced down interest rates during 2001 with
repeated rate decreases in order to (belatedly) stimulate a bogged down
economy. Did it work? Sort
of. Consumers and homeowners
busily continued consuming and built up debt to record levels while
enjoying the lowest interest rates in years.
There's
price and there's affordability. Affordability
is a function of the price of debt as well as the amount of debt.
While the local real estate market has seen escalating prices,
homebuyers merrily continue to pay these prices partly due to a lack of
alternatives but perhaps because the price of debt keeps falling and the
ease with which debt can be acquired.
That is the most worrisome part of the equation, the ease with
which one can go into debt in the current economy.
Inexplicably,
this has occurred while news of layoffs, a falling stock market, corporate
bankruptcies, and corporate scandals are common news items.
Over
the past two years, market conditions within the Boston (and the nation,
generally) office and R&D/industrial sectors have deteriorated
markedly. Within first class sub markets, initially the change appeared to
be sudden and unpredicted. Looking
backwards with the peculiar clarity that characterizes perfect hindsight,
it was obvious, wasn't it?
The
huge runup in the commercial sector was part and parcel of the even huger
run up in the technology sectors that drove this last great economic
expansion. When the change
came, we were comforted by the fact that it was due to sub lease space and
other subtle factors.
Well
into 2002, how is the housing sector doing?
As with all real estate markets, it's difficult to generalize, but
it's necessary to at least try. There
is every sign that the high end has tapered off over the past several
months. Properties are
languishing on the market; high asking prices are meeting resistance. This
development makes most sense since the national corporate contraction very
directly affects those who can afford the most expensive homes.
New
construction continues to enjoy steady demand, mostly because of the
inherent shortage of land and new housing in the region. The condominium market does not seem overbuilt just yet.
The
most interesting development may be in the multi-family rental market.
While the prices of two families in most areas in the Greater
Boston Market are still strong and stable, many owners complain that they
have stubborn vacancies and resistance to asking rents for the first time
in years. Many agents note
that tenants are not always paying the entire rental fee and that many
landlords are offering a month free or other incentives to rent.
With
all the discussion about housing shortages and lack of affordable
multi-family housing, a large number of luxury apartments were created.
Again, the top end was served: this is true both of rental and
sales markets. Is this the
outcome that was desired?
Final
Thoughts. Is housing in for a fall this fall?
It has been observed more than once that real estate is a lagging
indicator and housing even a greater lagging indicator.
We have observed housing overhangs before, during the late 1980's
early 1990's: during those calamitous times, housing followed belatedly
but very decisively.
As
the markets just saw in commercial sectors, it's easy to say the
correction will come, it's harder to know just when.
As the recently concluded past tells us, when the highs feel too
high, lows surely are in the offing.
What
will happen this time, if anything? And,
more important, what form will it take? To most, it's truly unclear where the consumer portion of the
economy is headed. It's clear
that consumers are carrying a lot of debt.
The loss of a job or a major account represents the difference
between carrying the debt uncomfortably and being between a rock and a
hard place.
Many
factors suggest that an overall economic turn toward the positive is
"just around the corner." There are as many factors that suggest
the opposite. Certainly some
national and international events, which, if they come to pass, could
delay the turnaround measurably.
It's
wise to err on the side of caution. That's
because there's not much to be said for predicting.
If there are surprises and unexpected twists and turns in the
future, housing will be in for its share of the down cycle.
However, the market does not operate totally as a monolith.
While the high end may languish, the entry level market remains
strong. The mid markets
benefit from an aging move up or laterally shifting population.
As
an aside, this is also true with retail as well: markets here have seen
rapid penetration by national companies where similar phenomena have taken
place throughout the country. After years of relative neglect, the New
England consumer is getting a chance to feel what the rest of the country
has been experiencing.
How
do appraisers fit in? Recently,
appraisers have enjoyed a surge of popularity as their numbers have not
swelled to completely meet recent demand for their services. Does this issue of value pressure arise now?
It's still an issue and always will be.
Now
is not the time to gamble with values.
The market has continued to outsmart even the most savvy of sages.
It's a loser's game, though. Appraising
is not gambling. At its best,
appraising is a cold hard look at reality.
This is the best time to practice appraising in its purest form.
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