Friday, October 31, 2008

An Apples to Apples look at House Deflation

In the local appraisal business for over five years, Troy Johnson has seen the market reach the heights of the housing bubble.  He has also held a front row seat to its recent rapid decline.  Johnson owns and manages Charlottesville-based Absolute Appraisals.  His team not only valuates properties in Albemarle but in the surrounding counties.

His experience in this market gives a clear picture of what is happening in our area with declining real estate values. 

In that time, he has seen a 15-30% decline in housing values. 

His figures aren’t hard and up to a statistician’s rigor, but they have great illustrative merit.  His approach gives an apples to apples comparison.  Absolute uses the same criteria and methods to assign value to the same property over the same period of time.

“Of all the orders we get,” Johnson says, “20% are reappraisals.”

Seeking more cash out of their homes for one reason or another, many homeowners go back to their loan officer for a new mortgage.   The loan officer contacts Absolute to redo the appraisal for the new mortgage.

Having a lot of repeat customers, Johnson has assessed the same homes over and over, some up to four times in the last two years alone.  “The same people keep coming back until they can’t come back.”

Curiously with all the press of the housing bust, many still believe their houses to be at the peak of their value.  Johnson finds that many, “still think their houses have risen in as much value as they heard about homes going up in Northern Virginia.”

So often, Johnson has to deliver the bad news.  It comes with a shock.  “What do you mean the house is only worth $250,000? That’s impossible.  I owe $270,000.”

Reporting the results back to loan officers who have ordered the appraisals, Johnson gets a now familiar response that sounds like Kubler-Ross’s stages of facing death. 

First is denial.  “How can that possibly be?  They did up grades.”

Then there’s the negotiation stage.  “See what you can do.  I got 55 loan officers in my office.  I’ll pass your name on to them.  You’ll get plenty of business.”

Finally, there’s desperation.  “This old lady is so nice.  She’s going into bankruptcy.  And she lost her son in an auto accident last year.”

Johnson doesn’t doubt the pitiful stories.  Many of these homeowners are desperate.  “But you can’t put that into an appraisal.”

In the present market loan officers know when they get a possible deal that it may not work.  They want him to check comparables before he even goes out to inspect the property.  They tell him, “If the value’s not there, stop immediately.”

He notices the most heavily declining areas are where there is excess supply.  These days, that is in condos and in new construction neighborhoods.  Builders who have gotten in over their heads have been dumping their excess inventory to the detriment of their previous customers.

Older neighborhoods have seen less decline.

Not only has this deflation led to less loan activity, Johnson has also seen it lead to the uglier side of this bubble bust – foreclosures.

“In 2006, not many people in this business [appraisers] knew what REO’s were.”

REO’s, short for Real Estate Owned, are properties that have reverted back to the mortgage lender/bank after a foreclosure sale has failed. 

In late 2007, Johnson started seeing REO business come in the door.  Banks hire his company and others like Absolute to make accurate assessments of how much their repossessed houses are worth in the present market.  The lenders use the numbers so they can wisely consider offers made by potential buyers on the properties.

Does he see a typical pattern in REO’s?  “It’s all across the board, except for the demo that pay cash for their higher-priced homes.”

But if it cuts across all racial and most demographic lines, the middle-class seems to be particularly hard hit.  The homes going into REO’s are mostly in the “$190,000 to $350,000,” range.

Now, between ten to fifteen percent of Absolute Appraisal’s business comes from REO work.  And Johnson sees no slow down in this area. 

The unfortunate fact is that it seems to be accelerating.

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