The Reality of the Sales Volume Numbers

Today, there have been all sorts of news stories about the decline of the real estate market.

The following is an excerpt by ALAN ZIBEL and J.W. ELPHINSTONE of the Associated Press (http://www.chicagotribune.com/business/sns-ap-us-home-sales,0,6400813.story)

"Previously Occupied Home Sales Sink 27 pct. to Lowest Level Since 1995 as Economy Weakens

Sales of previously occupied homes plunged last month to the lowest level in 15 years, despite the lowest mortgage rates in decades and bargain prices in many areas.



July's sales fell by more than 27 percent to a seasonally adjusted annual rate of 3.83 million, the National Association of Realtors said Tuesday. It was the largest monthly drop on records dating back to 1968, and sharp declines were recorded in all regions of the country.


The plunge in home sales also magnified fears about the broader economy.


"The housing market is undermining the already faltering wider economic recovery," said Paul Dales, U.S. economist with Capital Economics. "With the increasingly inevitable double-dip in prices yet to come, things could yet get a lot worse."

Sales were particularly weak among homes in the lower- to mid-priced ranges. For example, in the Midwest, homes priced between $100,000 and $250,000 tumbled nearly 47 percent.

As sales have slowed, the inventory of unsold homes on the market grew to nearly 4 million in July. That's a 12.5 month supply at the current sales pace, the highest level in more than a decade. It compares with a healthy level of about six months."

Further in the article, it states: 

"The drop in July's sales was led by 35 percent plunge in the Midwest. Sales were down 30 percent in the Northeast, 25 percent in the West and 23 percent in the South."
Once again, NAR has released statistics that may be difficult to understand.  These statistics are pertaining to Sales Volume (or the total number of homes to sell).  True, the decline is significant, if not staggering.  The Midwest is down 35%, but according to the Market Report statistics in the MRED, Inc. (Chicago area's local MLS Service), it is 39.25%.  This is shown in the following table.
 

The article quotes statistics such as largest drop since 1995, and the largest monthly drop since 1968.  Professionals in the real estate industry do not want buyers and sellers to panic with these numbers.  

There is no question that the drop was significant, if not alarming.  But to better understand the drop, readers should understand Closed Sales typically drop at this time of the year.  This is due to the Spring market activity (contract pendings) that take place in March, April and May, that close in May and June.  Now the July activity shows the summer slowdown that continues into the Fall and Winter months, traditionally called "Seasonal Markets." 

A significant portion of the 39.25% drop reflects an accelerated demand that took place due to the tax homebuyer incentive program that existed until April 30, 2010. 

One way to look at the combined June/July statistics and see that according to the figures above, in 2009, the total was 14,957 residential units closed in the Chicago area, while in June/July 2010 a total of 15,631 homes closed in the Chicago area, which actually shows a 4.51% INCREASE from 2009 to 2010. 

In fact, the sales volume from 2008 to 2010 also shows an increase of 1.94%.  This is good news.  A wait-and-see approach of how the rest of the year will pan out would be the best approach rather than alarming the John Q. Public.  See the table below.

The real issue here is yes, the decline reported by NAR today has been very significant:  significant enough to shift the stock market and is at the headlines of major newspapers and radio and television have reported this story.  But the fact that the tax incentive accelerated the demand for housing this Spring, and because it expired on April 30, 2010 (date the property had to be under contract), it shifted the Spring market forward - much like the "cash-for-clunkers" program did for the auto industry - it accelerated the demand and left the industry with a hangover. 

The overall bigger picture is more homes sold during this period in 2010 than in 2009 or 2008.  Perhaps the most telling tale is looking at the Chicago area's year-to-date Sales Volume.  See the table below for a brighter picture.



According to the statistics above, 2010 is outpacing both 2008 and 2009 in the year-to-date sales volume.  It is 2.51% ahead of 2008's sales pace and 22.05% ahead of 2009's sales pace.  This is wonderful news.  The sudden drop again, was fueled by the accelerated demand of the housing credit program.

The headlines and articles are very "doom-and-gloom" today.  I offer another perspective with these figures.  I still believe our local real estate market is trying to improve, and the discussion of another recession and the nervousness on Wall Street is not contributing to positive consumer confidence.  As I have said many times over, we need the unemployment to get better and that will solve many of our real estate problems.

Contact Chip Wagner, SRA, SCRP at chip@wagnerappraisal.com or at (630) 416-6556

THE GREAT SQUARE FOOTAGE MANDATE

Author’s note: Please realize the terms “square footage” and “gross living area” are used synonymously in this blog.

Most common tool appraisers use
is the fiberglass tape measure.

Today it became official in the Chicago area… real estate brokers and salespeople must now include the property’s square footage on their MLS listings. Our MLS system, the Midwest Real Estate Data, Inc., has a field on the listings called ASF, or Approximate Square Footage. Effective 8/17/2010, it will be mandatory that the agent populate this field instead of leaving it blank.

Historically, it was always said that Realtors in our market were advised not to complete the field because their brokers would reference a lawsuit in which a Realtor advertised a Gross Living Area (or Square Footage) on a listing that was inaccurate. The Realtor and their company were sued for advertising an inaccurate size, and eventually lost the suit.

Today, for the properties that I analyze in our MLS system, I would estimate about 20% of the properties have an Approximate Square Footage reported. Some regions are better than others. Some agents actually measure the property, other agents use the square footage from the local assessing body, and others use the total reported by the builder.

You are more likely to see one of these
with a carpenter than an appraiser

Under the new mandatory requirement, the agent will also be required to report the “source” of the square footage amount, and that could be any of the following: Appraiser, Assessor, Builder, Landlord/Tenant/Seller, Plans, Survey, or Taped. Furthermore, they even have the following options available: Other, Estimated, or Not Reported. (The entire instruction at the bottom) My hope is the agent will either measure the home, use the plans (or blueprints), or use the assessor’s figure. A problem is many assessors have inaccurate data, and some in the Chicago metropolitan area are not even available. My fear is most agents will select “Not Reported” or put “Estimated” or “Other.” How many might just put 3,000 sq.ft. and Estimated as the source.  That doesn't help us out at all.  I'd rather have Not Reported.

And how much credence do we put in a Landlord’s, Tenant’s or Seller’s opinion of the size of their home? I have yet to meet an owner who really knows the size of their home. Most will over-emphasize the size (unless they are talking to their local township assessor - then they want it smaller).

The old school roto-wheel. Some
appraisers still are comfortable with this
but it is the least accurate tool.

Another fear is “Builder” will be selected as a source on new construction properties, and the realities of this are some builders do not always follow any standards for calculating the size of their homes. The biggest problem that I personally see is condominium units in the City of Chicago. Builders often include more than the inside walls of the living area in the square footage. They include balconies, storage spaces, and even garage spaces in their advertising. I have measured too many condos in the City of Chicago at 925 square feet, only to have the builder advertise to the buyer that the size is 1,250 square feet, with their rationale being because they include 50% of the common hallway (3’ x 20’ = 60 square feet), the 4’ x 10’ (40 square feet) balcony, the 5’ x 5’ storage locker (25 square feet) and a 10’ x 20’ garage space (200 square feet). When the appraiser measures the true gross living area, and it is 925 square feet, the property owner either thinks the appraiser is absolutely wrong because the builder would never lie, or they feel cheated by the builder. Either way, this is definitely a bad scenario to be in, and I have been there dozens of times through the years.  Not all builders and developers do this, but it definitely happens.

Simple Condo floorplan

WHY IS GLA OR SQUARE FOOTAGE IMPORTANT?

One of the critical items of comparison when a real estate professional analyzes a property is the actual size of the property. As an appraiser, we calculate the Gross Living Area (GLA) of the property that we are appraising (the subject property), and the result is a number calculated in square footage. We don’t include attics or basements, or rooms lacking proper insulation and heating/cooling that could be considered a “three-season porch.” Rest assured, finished basement areas do get credit in the value of the property - significant credit in many cases. I have seen people that have invested in excess of $250,000 in their basement finish with multiple rooms, extensive bars or kitchens, media rooms that rival you local movie theater, and even indoor golf ranges.  They are just not included in the above grade living area of the dwelling. Same thing goes for attic and other areas.

Example of a floorplan with angles -
these are a real challenge to measure!

While I applaud this new MLS requirement, I am very skeptical that it will be meaningful or successful in the short term. It is still better than what we have had.  I've seen other MLS systems in different parts of the country that have GLA as a field, and they can produce some excellent cost per square foot statistics.

I say I am skeptical because my years of knowing fellow appraisers who can't measure a home.  I'll explain my point. 

In completing an appraisal, the appraiser is required to measure the home to find the size. Then the appraiser compares (aka comparables) the home they are appraising to other homes listed or sold. The appraiser must confirm that home’s size in square footage. It is very important to have accurate information, and the appraiser often has to research multiple sources for that data.  Even if agents are populating that field today, the appraiser must confirm from a reliable source, such as in public records.

My appraisal business specializes in "relocation appraisals."  The relocation appraisal is a specialized niche, and helps an employer establish a transferring employee’s home value for a guaranteed buyout. The relocation appraisal is unique in the fact that a “peer appraisal” is completed on the property being appraised. The clients who order relocation appraisals typically maintain in-house databases of the most experienced residential appraisers to complete these appraisals because of the high level of accuracy that is demanded. Furthermore, because the home actually sells after the appraisal is completed, the appraiser's accuracy is tested against their value opinion, something not found in lending appraisals.  This is because in a lending appraisal, if it is a sale, the value is given to them; and if it is refinance appraisal, it doesn't sell so it could be high or low and we would never know.  Note: I have been appraising since the mid-1980's and have completed relocation appraisals on close to 5,000 homes in the Chicago area.

One issue that may frequently arise in relocation appraisals are “square footage discrepancies.” One of the requirements is that both appraisers personally measure the subject property and be within 100 square feet of one another. If they are “out of spread,” both sketches are shared with the other appraiser, so that they may attempt to see where the differences may lie and come to a conclusion on the home’s size. If it cannot be resolved, the client requires the appraiser to return to the property to remeasure the home. I can tell you from personal experience, all it takes is a couple of times being asked to return to a property that might be 30 miles away, for you to be pretty darn sure in your future accuracy in measuring a home the first time. I laser-measure every dimension inside and outside as a check and balance. Residential appraisers who do appraisals for other purposes (lending, etc.) typically don’t ever have the “peer appraisal” element, therefore are never challenged on their accuracy in measuring a home.

My point in this explanation is that square footage discrepancies often arise in relocation appraisals. Sometimes it is because one appraiser rounded to the nearest foot, while another measured to the inch. Other times it is due to the difficulty in measuring these homes as the complexity of residential construction over the past few decades has resulted in unique layouts and floor plans, with cantilevers, bays, angles, open areas, areas over dead space or garage areas, etc. - not a simple rectangle like homes built 30, 50, 100+ years ago. See the images below.  And I hate to say it, but sometimes I've seen appraiser sketches that do not even resemble the layout of the home.

COMPLEX SKETCH

The above sketch is a 12,000 square foot home in Chicago's western suburbs.
Notice the angles and curves.  The appraisal inspection took 3 hours and it
took me about 1.5 hours to convert this sketch into my sketching program.

SIMPLE SKETCH

This is a sample of a simple sketch -
mostly a "box" to measure with 3 bay windows.

WHY DOES ACCURATE SQUARE FOOTAGE MATTER?

I recently completed an appraisal in Naperville, IL. The home’s value is $525,000 and my actual measured square footage is 3,769 square feet. The Assessor reports the home is 3,363 square feet. The Agent is advertising 3,980 square feet based on an unidentified source.  This is not at all an uncommon scenario.

Under this scenario, the cost per square foot of the home varies:

• Appraiser: $525,000/3,769 sq.ft. = $139.29 per square foot

• Assessor: $525,000/3,336 sq.ft. = $157.34 per square foot

• Agent: $525,000 / 3,998 sq.ft. = $131.98 per square foot



Considering this real life scenario, if I were appraising another home that had 3,400 square feet, the value (based on cost per square foot only) would range between $448,732 and $534,956. That is a $86,224 difference. If this was your home, and you were getting ready to sell it, would this $86,224 matter to you? Absolutely!


NEW RULES FOR MRED, INC. INPUT OF MLS LISTINGS


• Approximate Square Footage – (Detached, Attached & Residential Rental)
o Has been modified to be a required field
o “0” entry is allowed and will not incur a fine
o All blank entries currently in the Approx SF field have been converted to “0”
o For searching on Approx SF, a checkbox “Include “0” matches” is displayed beside the search field


o Note: If you measure the Square Footage (Square Feet Source=Taped) MRED recommends that you enter the Gross Living Area – GLA - in the Approximate Square Footage field, which is defined as: finished space that is above grade only. Per the American Measurement Standard - In single-family detached dwellings, “finished” square footage is defined as the sum of all connected, finished, usable, areas; measured by exterior dimensions (walls). Each level is counted individually and any above grade space is combined to provide one total square footage number. Treat attached dwellings the same as detached dwellings, with the only difference being the addition for exterior measurements when a common wall is present. When in doubt always check with your broker for guidance and instruction.


• Square Feet Source – (Detached, Attached & Residential Rental)
o New required tabled field with the following codes:


A-Appraiser
B-Assessor
C-Builder
D-Estimated
E-Landlord/Tenant/Seller
F-Other
G-Plans
H-Survey
I-Taped
J-Not Reported


o Existing listings with “0” in ASF field automatically have J-Not Reported assigned in this field
o Where “0” is added in ASF, only J-Not Reported will be allowed to be saved in this field

A. L. Wagner Appraisal Group, Inc. is proud to have been serving the Chicago metropolitan area since 1970 by its founder Alvin Wagner Jr. Currently lead by his son Alvin III, known as “Chip,” we specialize in corporate relocation appraisals and complete residential appraisals for all purposes including lending, REO/Foreclosure, Legal (divorce, estates, trusts, litigation support), market value appraisals for Realtors and individuals for both listing and selling purposes. Visit www.WagnerAppraisal.com for more information on our qualifications and services. Thank you for your referrals!


You may contact us at (630) 416-6556 or via e-mail at: Chip@WagnerAppraisal.com. All information contained in this Blog was created by Alvin L. “Chip” Wagner III, SRA, SCRP and is the opinion of the author.

Chip Wagner can provide professional service to calculate the Square Footage of a residential dwelling.  Over 10,000 homes have been personally measured by Chip throughout his career.  Chip uses a Leica Disto Laser Meter to measure homes, which is a device accurate to the nearest 1/16 of an inch with a range of 650'.  The results are calculated in APEX IV Professional Sketching Software and certified by Chip Wagner.  Call for a quote for service.  Our fee will be quoted based upon the estimated time and complexity, including travel distance.  Volume discounts may apply.