Does Home Heating Fuel Affect Value?

Posted on April 26, 2023 by Mike Perry

By Michael Perry, MA Certified Residential Appraiser

mperryappraisal.com

04/26/2023

I recently had the opportunity to speak with some great local real estate agents about a wide range of topics. We discussed appraisals, market value, and many other issues related to the overall housing market. The hour and a half flew by and although we covered many topics, there were many more we didn’t have a chance to discuss. One of these topics was a question about whether appraisers consider different heating fuels and what affect they may have on value.

It’s a great question and I finally had a chance to dive into some data, but first I want to make it very clear that my opinions here and the data discussed in this post are relevant to my market (Massachusetts) and may not reflect conditions in other parts of the country. When it comes to the costs and market reaction of different heating fuels, so much depends on the local market and the conditions which exist within it. With that said, let’s get into it.

Price Volatility

I wanted to start by seeing how each of the primary fuel sources have varied over the years. The most common fuels in this area are oil, natural gas a electricity (no offense, propane). I created the charts below from data I compiled from the most reliable sources I could find, but please keep in mind that I can’t guarantee absolute accuracy. When possible I used reported prices as of January of each respective year in an effort to create a reliable comparison. Let’s start by looking at all three heating options and how price trends have changed since 2000.

The scale in this chart creates a slightly misleading trend for oil prices, however we can see that prices for all fuel sources vary over time and there are a variety of reasons for this. General economic conditions, geopolitical factors, foreign events, political and/or social agendas, and other unexpected events such as the global pandemic can all influence the price of heating fuels to varying degrees. Due to the myriad of factors which affect fuel prices it can be very difficult to predict where each will be one, five, or ten years from now.

When I started my appraisal career in 2002 we typically made a negative adjustment for electric heat because it was generally viewed as the most expensive option. Then the war in Iraq and Afghanistan led to wild volatility in oil and gas prices; if you weren’t in the real estate biz then, or if you’re not old enough to remember what was going on at that time, check out the charts below and look at gas and oil prices from 2002 until about 2006/2008. At that time, the price of a barrel of oil dominated the news and homeowners felt the economic impact which began to influence buying decisions in the housing market.

From 2002 to 2006, the price of natural gas rose approximately 96%. This was followed by a decade of declining prices, then some stability for a few years, and then a sharp increase over the past few years.

Similar to natural gas price, the cost of oil increased steadily beginning in 2002. However, unlike gas prices, the cost of home heating oil continued to soar through 2014 before finally receding and stabilizing for about 7 years, and then jumping again from 2021 until the present.

During the early years of the Iraq and Afghanistan war appraisers started questioning whether the longstanding aversion to electric heat was still really impacting buyers’ decisions. Locally, from 2002 to 2006 prices for each of these heating sources had increased:

Natural Gas +96%

Oil +106%

Electricity +45%

Suddenly we found that many buyers didn’t want the volatility of gas and oil but instead preferred the relative stability of electricity rates. It was all going up, of course, but it made sense because buying a home requires adherence to a monthly budget, and uncertainty over the heating bill could lead to difficult financial and lifestyle decisions.

While electricity rates rarely decline, we can clearly see that prices for this option are far less volatile than gas and oil. It would be reasonable to assume that prospective home buyers, when preparing to make such a significant purchase, would prefer a more predictable home heating expense to have confidence in their financial budgeting plans.

Does It Affect Value?

So this all leads to the point of this post about whether home heating fuel influences market value. As I discussed above, there was a palpable sentiment among buyers in years past about having an aversion to electric heat due to the clear and rather significant higher cost compared to gas and oil. Even still, there were times when agents and homeowners would express an aversion to oil because of the perception of it being a ‘dirty’ fuel, or the desire to use a more sustainable and environmentally-friendly heating source. Others expressed concerns over the safety of heating with natural gas. Whether real or perceived, some had concerns regarding carbon monoxide poisoning or the combustible nature of natural gas. Here in Massachusetts those fears were exacerbated in 2018 when a series of gas pipeline explosions leveled dozens of homes, injured several people, and even resulted in one death.

The bottom line here is that as appraisers we must know the market areas in which we work, and use market data to drive our value conclusions. While it was apparent that most buyers were less willing to purchase a home with electric heat up until the early 2000’s, changes in the energy industry, social narrative, and political climate have blurred the lines between cost and value of heating fuels. Government intervention also plays a role as laws and regulations of those in power influence the cost of producing specific fuels while incentivizing or subsidizing others. There are many who feel compelled to use alternate, sustainable energy sources, and yet others who would argue that producing more wind and solar power, or a move away from fossil fuels to an electric world, is counter-productive due to the materials needed to produce those alternate energy sources and the concerns over relying on foreign nations to provide the materials and technology needed for the transition.

All of these complexities have led me to develop a professional opinion that, in my market, heating fuels are a personal preference by each buyer. It has become more equivalent to paint color or style choices in which some buyers prefer white cabinets and natural gas heat, while others prefer hardwood flooring and electric heat. In some cases a preference may depend on specific location or trends within a specific neighborhood or community.

For example, a neighborhood may be developed with a focus on limited environmental impact which may include utilizing renewable energy sources such as solar panels, home designs which comply with LEED certification standards, and even site designs and home placement which take advantage of passive solar heating. In these cases, typical buyers of homes in that area may be willing to pay a higher price for homes which meet their specific preferences centered around environmental concerns. In other areas, buyers may prefer natural gas because it’s responsibly produced, readily available, reliable and clean-burning.

This issue can be complicated but buyers and sellers will often provide these answers for us by their actions. As a general rule, however, I cannot say with confidence that any specific home heating fuel in my area universally has an influence on market value. And in our current market, which continues to demonstrate historic inventory shortages, buyers tend to be more tolerant of the things about which they may otherwise value more positively or negatively, simply because the options are so limited. I would suggest that the most reliable conclusions in this type of market can be drawn from trends in new construction where the buyer gets to choose the heating system and fuel, however it should be noted that some options are not available in all locations.

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Confessions of a Former Property Data Collector

Posted on March 28, 2023 by Mike Perry

By Michael Perry, Certified Residential Appraiser

mperryappraisal.com

Changing The Rules

If you haven’t heard, Fannie Mae has recently updated their guidelines about the role of appraisals in mortgage lending. You can read about Announcement SEL-2023-02 here. Under the guise of “valuation modernization”, Fannie is now willing to accept and purchase loans without traditional appraisals in some instances. Fannie claims these alternatives will benefit consumers by providing greater appraisal accuracy, lower costs, and will eliminate bias while increasing the speed of loan approvals.

While acknowledging that traditional appraisals may not be necessary in some rare situations, such as when a borrower’s credit rating, income and down payment constitute a very low risk, it could be argued that an independent professional establishing the market value of any property secured by a government-backed institution is in the best interest of all taxpayers. Don’t get me wrong here – if a lender wants to use their own funds without a taxpayer-funded safety net then have at it. But the past bailouts of large lenders with our money because of poor decisions by them should have us all holding the mortgage industry to a very high standard.

Property Data Collector

I used to be a property data collector. I would go into a house, take pictures and some measurements, and jot down some notes about what I saw. I must admit that I had absolutely no perspective or context on which to base an opinion of a property’s condition or quality. I had no experience in recognizing potential structural issues, functional inadequacies, or health and safety risks. Including my own house, at that time I had been inside about 10 or 15 different homes. Maybe 20 or so if you include places I saw when I was a toddler. That was my reference point.

It was 2002 and I had just completed the required appraisal courses to sit for my appraiser trainee license exam.

My First Appraisal Education Certificate

It all started with Basics of Real Estate Appraisal and altogether I committed 75 hours and about a thousand dollars to get there. I passed my state exam on the first try and was officially a licensed trainee appraiser ready to start my career. For several months I tagged along with some experienced appraisers as they inspected properties, and I peered over their shoulders while they filled forms using information gathered from the inspections. I went with them to local town hall buildings and watched as they requested assessor maps and field cards, sometimes paying a quarter for a copy so it could be further analyzed back at the office. Fortunately, most pertinent information is now available online but I learned the old fashioned way which included more effort, more mileage, and more interpersonal skills.

And then one day, which was maybe 6 months into this journey, I was a property data collector going into the homes of strangers all by myself. I was a terrible, inexperienced, and a “know just enough to be dangerous” property data collector. At this point I had visited dozens of properties and began to develop an understanding of what information was critical in the property data collection process, but admittedly I was still learning on the job.

This, of course, is the natural evolution of many professions as true expertise can’t be taught in a classroom or learned from a few YouTube videos. But the fact that I was required to go through this process under the tutelage of a fully licensed mentor underscores the importance of having a system in place to train appraisers through field experience while being required to work alongside a seasoned and fully licensed mentor to assure our clients and the public that the appraisals I was working on were also reviewed and signed by an experienced professional.

Experience Equals Credibility

Over the next 20 years I would take hundreds of hours of additional required appraisal education courses, adapt to changing regulations, adopt new technologies, and gain invaluable experience as I inspected some 5,000 or so residential properties. I’ve taken courses on home construction and have had many personal conversations with builders and licensed contractors. I have connected with hundreds of real estate agents, lenders, attorneys and home inspectors who are now as much a resource for me as I am for them. And I have connected with and learned from peers through social media and the multiple trade conferences I have attended around the country throughout the years.

It is from this wealth of training and experience that I have a deep understanding of how important it is not only to accurately gather data from a property inspection, but what data is critical, what questions I should be asking, and why that data is imperative to develop my appraisal and produce credible results. My clients have always known that I’m not perfect but also trusted my decades of experience to perform the critical property inspection part of an appraisal. They also know that I am a fully insured and licensed professional who must adhere to a litany of state and federal regulations, and that I am compelled to act in an unbiased manner at all times with respect to the property and all individuals involved.

Regressive Action

The recent decisions by Fannie Mae, which is supported by appraisal management companies and politicians, is unquestionably a regressive step in protecting consumers. By green-lighting an initiative to allow unlicensed, unregulated and inexperienced individuals to enter the homes of consumers, the public should have far less confidence in the mortgage industry. These property data collectors, whom Fannie Mae has said the lenders are solely responsible for training and vetting, are being trusted to accurately collect critical information while remaining unbiased in their work. Why?

Fannie Mae has granted lenders the independent authority to vet and train property data collectors, and to ensure they are competent to perform this critical appraisal function. By contrast, appraisers must follow training and practice standards set forth by the Appraisal Qualifications Board (AQB), must adhere to the Uniform Standards of Professional Appraisal Practice (USPAP) at all times, and are subject to licensing requirements of our respective state licensing boards who, by the way, have the power to investigate and sanction us if they determine that we are not adhering to these requirements. As far as I can tell, oversight of property data collectors begins and ends with the lenders who employ them. Yes, the same lenders who are financially motivated in these transactions and who know the government will bail them out with taxpayer money should they mismanage their institution.

Supporters

You may be surprised to learn that these new alternative appraisal options are supported by appraisal management companies. What’s that? You have no idea what an appraisal management company is? Huh. Well, beginning with the defunct Home Valuation Code of Conduct (HVCC) and later codified in the Dodd-Frank Act, lenders are required to add a layer of separation between the appraiser and their loan production staff, which are those who are compensated on a commission basis for closed loans. Lenders can choose to hire staff in a salaried position to satisfy this requirement or farm this process out to a disinterested third party. This is where the appraisal management company, or AMC, enters the picture.

The primary role of the AMC is to act as an agent of the lender in managing the appraisal process. They will vet appraisers for proper licensing and competence, order appraisals on behalf of a lender, perform preliminary quality control checks of appraisal reports, and deliver the completed appraisals back to the lender. Essentially, AMCs act as a conduit between the lender and appraiser for the intended purpose of eliminating pressure on appraisers by those who are financially motivated by a loan transaction, and to ensure appraiser independence requirements are being maintained. But in a relatively short time period, AMCs have stretched their role far beyond their intended scope, increasing the cost of appraisal services to consumers and weakening the appraisal profession in the process.

While in theory this [implementation of AMCs] creates more protections for borrowers by reducing unscrupulous lending practices, it has some negative effects as well. Since many AMCs negotiate contracts with large, institutional lenders, appraisal rates are set nationally and don’t account for regional differences in labor costs. This can lead to a situation where the AMC will only pay the local appraiser a rate that is much lower than the prevailing rate. The best appraisers choose not to work for these AMCs and instead affiliate with local lenders who better understand the local market and customs and pay market-level fees for appraisal services.

This creates a divide in both the cost and quality of appraisals. Many appraisals through large lending institutions (Citibank, Chase, Wells Fargo, Bank of America, etc.) are offered at low rates, thus drawing less experienced appraisers who often are located far away from the location of the subject property. These appraisers typically don’t understand local market dynamics and have a harder time identifying appropriate comparable properties, resulting in lower property valuations.

This can leave property buyers holding the short end of the stick. Since the valuation may come in lower than prevailing market values, there may be a delta between the loan amount needed to complete the transaction and the amount of money that the lending institution will offer based on a valuation made by an inexperienced appraiser.

Forbes.com

In making the shift to alternative appraisal options by using property data collectors instead of licensed appraisers, Fannie Mae has created an exclusive list of vendors through which lenders may order these products. This list includes AMCs and analytical firms and to be on it means great news for their future revenue stream. But what qualifies an AMC to be leaned upon for this radical shift by Fannie Mae? Good question, and I don’t really have an answer. But what I can say is that many AMCs, including those on this exclusive list, have spent many years (and presumably millions of dollars) trying to edge out independent fee appraisers and replace them with automated valuation tools and staff appraisers that they control financially.

Making The Sausage

It’s important to touch briefly on the pay structure for appraisals which should bring this picture into full clarity. When you go to your lender for a mortgage loan, the lender is likely to need an appraisal of the property. You will be charged an appraisal fee, of course, but this is where consumers typically lose the trail of where their money is going. If your lender chooses to farm out their appraisal management to an AMC, then the AMC needs to get paid. Surprise! You’re paying them. The “appraisal fee” you are charged is sent to the AMC and then the AMC generally puts that appraisal order out to bid, often seeking the lowest bidder so they can maximize how much of your money they get to keep. In some markets these bids can go out to dozens of appraisers who must compete against one another in a blind reverse auction, hence the above analysis which explains why AMC appraisals are often of lower quality. The AMC business model has become “fast and cheap” rather than being focused on the experience level of the appraiser or the quality of the appraisal itself.

And that leads us back to the question of why AMCs have been jockeying for position in an effort to be among the coveted “approved vendors” list for these alternative appraisal options. In short, when the role of the real, licensed appraiser is reduced or eliminated, the AMCs can keep more of your money. This has nothing to do with eliminating bias in appraisals because there is no mechanism to ensure the unlicensed, unaccountable non-appraiser collecting data will act in an unbiased manner, especially compared to the alternative option of having a licensed professional appraiser collect that data. It’s laughable to think that a property data collector trained by a lending institution, who has no requirement to be experienced in the field of real estate, will be able to produce more reliable results than a licensed, experienced professional appraiser. Simply put: don’t be fooled into thinking this so-called “valuation modernization” nonsense will actually make appraisals more accurate, more affordable, or more fair because nothing could be further from the truth.

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There’s No Comps! 3 Tips For Determining Value With Limited Comparables

Posted on January 12, 2023 by Mike Perry

By Michael Perry, Certified Residential Appraiser

mperryappraisal.com

01/12/2023

Comparables

The foundation of an appraiser’s sales comparison approach to value is in the selection and analysis of comparable properties. Comparable sales will tell us how much buyers have paid for other competing properties, and comparable on-market listings indicate prices current sellers are hoping to receive. Analyzing and comparing sales of similar properties allows us to understand where the property being appraised fits within the market and leads us to a value conclusion which is supported by market data. While there are other methods we can use to develop an opinion of value, the sales comparison approach is often the most reliable and it also happens to be the only approach required by Fannie Mae when the intended use of the appraisal is for the purchase or refinance of a single family property.

Comparable sales and listings are not only the lifeblood of an appraisal but are also critical to agents when pricing a listing. Agents may run a CMA, or comparative market analysis, to help suggest a listing price to a prospective seller. A CMA will usually include sales and listings of similar properties in the same neighborhood or market area based on the search parameters used by the agent. With robust data, these reports can be helpful to understand prices in the area and where the new listing would fit in. Agents will also typically look at individual comparable properties which have sold, and research active listings which the property will compete with once listed. As with appraisers, more data means more reliable results and more confidence in a listing presentation to a prospective client.

Missing The Mark

If a property is listed too low then the seller may leave tens of thousands of dollars on the table. If it’s priced too high then the listing could languish on the market and risk being perceived as overpriced, where it may eventually become stale and essentially invisible to buyers. So pricing a listing appropriately is very important to ensure sellers realize the full potential of their property but don’t waste valuable time being priced higher than it should. This is why agents are well-served to become proficient at analyzing market data and estimating value, even if the primary focus is on marketing and sales.

A lack of recent sales makes this process much more difficult, and a lack of active listings does not provide the needed guidance to adequately gauge where the market is right now. And this is the problem we’re facing right now in Western Mass.

The chart above was included in my recent post about the historic lack of new listings during 2022. In researching data for that article I discovered there were fewer new listings in 7 different months last year (including the last 5 months of the year) than in any other year since at least 2002 for that respective month. So, there were fewer single family homes listed for sale in January 2022 than in any other January since at least 2002. Same for March, August, September, October, November and December. And December 2022 was extra special as there were fewer new listings in December than in any other month over at least the past 21 years. It’s a clear understatement to say we did not have enough listings last year not only to satisfy buyer demand, but also to assist with developing market value opinions.

The logical and unfortunate consequence of so few listings is that it leads to very low sales volume. If we look at the average number of sales for the past 3 years, sales volume in 2022 was down:

  • August -12.7%
  • September -9.0%
  • October -21.1%
  • November -22.9%
  • December -34.2%

None of this is great, of course, but if we focus on December then we can see that there was historically low inventory and a significantly low number of sales. Here’s a look at year-over-year data for December:

With 37% fewer sales compared to last year and 34% fewer than the prior 3-year average, we are missing more and 1/3 of the sales from December than is typical. Add in the low sales totals from the 4 prior months, plus the lack of current inventory, and finding comparables is trickier than spending less than $200 at the grocery store.

Here are some tips when there are limited comparables available

Tip #1: Make Sure Comparables Are Comparable

Fannie Mae says, “A minimum of three closed comparables must be reported in the sales comparison approach” and that “contract offerings and current listings can be used as supporting data, if appropriate”. Fannie isn’t the authority on appraisals, of course, however they do buy an awful lot of loans in the secondary market and, as such, most lenders require that appraisals adhere to these guidelines. Consider this fair warning that you may see some comparables now which you don’t believe are truly comparable, but that the appraiser was required to use at least 3 in the report and those (should) represent the best available.

Using comparables which are not perfect is not uncommon and it’s perfectly acceptable, as long as the appraiser determines that those properties “..are the best and most appropriate for the assignment” and that the appraiser has accounted for “all factors that affect value when completing the analysis”, per Fannie Mae. They should be similar in physical and legal characteristics to ensure they are truly comparable, including being similar in site, room count, finished living area, style and condition. These guidelines appropriately note, “This does not mean that the comparable must be identical to the subject property, but it should be competitive and appeal to the same market participants that would also consider purchasing the subject property”. Appraisers tend to refer to this as properties which a typical buyer of the subject property would consider to be a reasonable substitute. In the case of limited available comparables it’s often necessary to deviate from using near-perfect comps. About this, Fannie says “Comparables that are significantly different from the subject property may be acceptable; however, the appraiser must describe the differences, consider these factors in the market value, and provide an explanation justifying the use of the comparable(s).”

Comparables from within the same neighborhood should be used however sometimes it’s just not possible. In cases where the neighborhood is unique and going outside that neighborhood would prohibit the development of a credible value opinion, the best approach is probably to go farther back in time to find older sales within that neighborhood. Which leads me to another important point and one which generates some of the greatest confusion among agents (and some appraisers).

Tip #2: Don’t Use Arbitrary Time Constraints

How far back can an appraiser go for comps? I get asked this question a lot. There is a longstanding belief that appraisers must use sales from within the past 12 months, or even 6 months. While the most recent sales are the best indicators of current value, the overriding concern should be to select the best available sales. Sometimes the best sales are slightly older and that’s ok so long as any changes in market conditions are fully accounted for. By “changes in market conditions” I’m referring to the increase or decline in values over time. With sufficient data we can rather easily analyze these changes and then apply market-based adjustments to the sale price of an older sale to estimate what that property would sell for in the current market.

I am fully aware that many agents cringe when they see older sales used in an appraisal – I’ve even heard appraisers referred to as historians since we look backwards at past activity. In a sense this has merit. The appraisal process, and specifically the sales comparison analysis, requires the use of closed sales which, by their nature, are historical. The one factor that is often overlooked, however, is the analysis we do of the market and changes in values over time. This allows us to utilize a sale which closed several months prior and adjust its price to reflect current conditions. In my opinion this is a far better approach than using a recent sale of a property which is less similar to the subject or not similar at all when considering appraisers are tasked with finding the best available comparable sales, and those sales must be competing properties which the same typical buyer would also consider.

As an example, consider these two options an appraiser may face when selecting a comparable sale to use in the development of an appraisal:

Sale 1 is nearly identical to the subject property in location, size, age, style, and overall features and amenities but it sold 8 months ago.

Sale 2 just closed last week but it’s located on a busy road, is 800 square feet larger, has fewer bedrooms, is 25 years older, and lacks similar features such as a pool and central air.

If we believe that the most recent sales should always be used then we may choose sale 2 and make adjustments for all of the differences, if appropriate. However, if we are looking for the best available comparables then we are more likely to choose sale 1 which needs minimal adjustments, if any, for differences in physical characteristcs. The only significant factor which needs to be analyzed for sale 1 is whether market conditions have changed since the date of the sale. If our analysis indicates that values for this property type in this neighborhood have, say, increased at a rate of 0.5% per month then we can simply apply that adjustment to its sale price and consider it to be a good indicator of the subject’s current market value. In other words, oftentimes fewer adjustments means a better comp, even if that one adjustment is for 8 (or more) months of changing market conditions.

Tip #3: Expand Beyond The Neighborhood

Just as some believe there are time constraints on the age of a comparable sale, some still believe that appraisers must use comparable sales within a 1-mile radius of the subject property. This is simply not true. Unfortunately, many lenders (and their AMCs) are stuck in the past and still think Fannie Mae has a rule which requires appraisers to use comps within a mile or explain why we deviated from this rule.

A 1-Mile Radius in Rural Montana Yields Few Results

My rural appraiser friends always laugh at the notion that comps must be within a mile of the subject property. Above is roughly a 1-mile radius of a property in rural Montana. How many other properties do you see? Now imagine trying to value a condo in Manhattan – there are likely thousands of sales within a 1-mile radius and not all of those represent the value of the subject property due to nuances of such a unique location. These are extreme examples, of course, however they illustrate how arbitrary the so-called 1-mile radius rule is.

Location is an extremely important factor to consider when developing an opinion of value, however distance constraints should not necessarily be considered. Instead, consider what drives values in that neighborhood and that specific location and then search for comparables in neighborhoods which share those factors. The Fannie Mae Selling Guide notes, “Fannie Mae does allow for the use of comparable sales that are located in competing neighborhoods, as these may simply be the best comparables available and the most appropriate for the appraiser’s analysis”. In such cases it is the appraiser’s responsibility to analyze the different locations and include commentary which explains that the comparable is located in a competing neighborhood, why the comparable was selected, how the competing neighborhood is comparable to the subject’s neighborhood, and address any differences that exist between them. Fortunately, real estate agents don’t need to adhere to these guidelines and explain themselves when using comps from competing neighborhoods when deciding on a listing price, but it’s a good idea to consider these factors to determine whether that sale across town is a good indicator of your property’s market value.

Other Ideas

These are just three basic tips for estimating value when there are limited sales and listings available. I would always recommend an incremental expansion of time and/or distance as going too far away or too far back could make results less reliable. That said, if you know your market then you should know what neighborhoods compete for similar buyers, and you should have a basic idea of how values have changed over time, if at all. When working in an area where you’re not as experienced, or if you are a newer agent or appraiser, don’t be afraid to devote some office time to research and analyze data for that area to develop more competency. Reach out to others who are more familiar with the neighborhood such as local agents and appraisers. Ask questions like; Why do people tend to buy homes here (ie; first time buyers, second home/vacation home, closer or farther from major roads/highways, etc)? What drives values in this area (ie; schools, proximity to major employer, access to public transportation, etc)? If a buyer is looking in this neighborhood, where else may they consider? Have you noticed any specific trends in local housing (ie; new construction, zoning changes, etc)?

I hope this helps as we undoubtedly head towards a period of limited sales and listing comparables. I believe it’s these times when things are less chaotic that we can really improve our abilities as real estate professionals, and I view it as an opportunity to get better at what I do. I hope you agree.

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Are You Eligible For A Real Estate Tax Exemption?

Posted on January 6, 2023 by Mike Perry

By Michael Perry, Certified Residential Appraiser

mperryappraisal.com

01/05/2023

It’s the start of a new year and this is a time when many of us resolve to make changes. Something else that changes this time of year is our property’s assessed value and our tax rate. Real estate taxes are the primary source of funding for most cities and towns, and our local tax assessor has the duty to establish the fair market value for our properties each year. A tax rate (technically called millage or mill rate) is then established and applied to the assessed value to determine our annual real estate tax bill. Our real estate taxes will fluctuate yearly based on trends in overall real estate values and on the city or town budget which was likely passed many months prior.

It’s no secret that real estate values have increased drastically over the past few years and most of us have seen our property taxes increase as a result. We could debate the fairness of this practice as a higher real estate value does not benefit any property owner unless and until we sell our homes and realize that equity. However, I instead want to focus on the impact higher taxes have on many homeowners and how some may be able to reduce their tax burden.

While researching for this post I contacted a local assessor’s office and asked how many seniors are currently receiving a tax exemption. I was surprised at how low that number seemed as it amounts to just 1% of all single family properties in this town. I have no idea how many of the properties in this town are owned by qualifying seniors, however U.S. Census data indicates that nearly 18% of all residents in Hampden County are 65 years of age or older and I would presume many of them are homeowners. This data also indicates that roughly 5% of Hampden County residents are veterans so I hope these brave men and women are aware and taking advantage of possible real estate tax exemptions, which they have certainly earned.

Note #1: I have included links at the end of this post which will bring you to your town’s official website, and directly land you on the page which offers information about applying for these exemptions.

Note #2: The following information should not be construed as legal advise or otherwise be relied upon as an extensive list of qualifications or benefits, but rather as a brief overview of information provided by the state through their publicly-available documents.

Personal Exemptions (Property Tax)

The state of Massachusetts recognizes that some segments of our population need and deserve a break on their obligations as a taxpayer. Massachusetts General Laws (M.G.L.) Chapter 59 Section 5, describes the many tax exemptions which exist in the state and there are few exemptions which pertain to residential property owners. These exemptions include legally blind persons, veterans and the elderly. Regardless of the Massachusetts city or town in which you live, these exemptions are available to you if you qualify.

Those seeking such exemptions must complete an application and submit it to your local assessor’s office by the deadline, and must continue to pay their tax obligations until their application for an exemption has been approved. Generally, the deadline to submit an application is April 1st or three months after the actual tax bills are mailed, whichever is later, however I strongly encourage checking with your local assessor’s office to ensure the proper forms are filed within the required time frame.

Legally Blind Persons

Clauses 37 and 37A of M.G.L. Chapter 59 Section 5, provide exemptions for legally blind persons who meet specific occupancy and ownership requirements. Those who qualify are eligible for an annual exemption of $437.50 (or $500.00 if your town has adopted Clause 37A). Documentation required to apply for this exemption include proof of legal blindness and evidence of domicile and ownership, and any additional information required by your town. To be eligible you must occupy the property as your domicile, which means the property is your principal residence and where you primarily live. You must also own the property with an ownership interest of at least $5,000, and will qualify if you hold a life estate or if your domicile is held in a trust and you are a trustee or co-trustee of that trust and have a sufficient beneficial interest in the domicile.

Please click this link to read the Taxpayer’s Guide to Local Property Tax Exemptions for Legally Blind Persons which is published by the MA Department of Revenue’s Division of Local Services. See links below to read information from your town.

Seniors

Clause 41, 41B, 41C and 41C-1/2 of M.G.L. Chapter 59 Section 5 allows an exemption to seniors who meet age, income, whole estate and residency requirements. For those who are elderly but do not meet one or all of the personal exemption requirements of this clause, the next clauses (17, 17C, 17C-1/2, 17D) may provide for a lesser exemption. Among the documentation required to apply for this exemption are a birth certificate, evidence of domicile and occupancy, income tax returns and current banking information. To be eligible, an individual must be 70 years of age or older or be a joint owner with a spouse who is 70 years of age or older as of July 1st of the tax year. The amount of this exemption varies but is generally between $500 and $1,000 annually, based on what regulations your city or town has adopted. It’s important to note that this exemption must be filed by April 1st or three months after the actual tax bills are mailed, whichever is later, as state laws prohibit local municipalities from processing late applications for that tax year. It’s also important to note that filing an exemption application does not entitle you to delay your tax payment, so be sure to continue paying required taxes unless and until your application is approved.

Please click here to read the Taxpayer’s Guide to Local Property Tax Exemptions for Seniors which is published by the MA Department of Revenue’s Division of Local Services. See links below to read information from your town.

Seniors, Surviving Spouses, Minor Children (Of Deceased Parent)

Clauses 17, 17C, 17C-1/2 and 17D provide partial exemptions to seniors, surviving spouses, and minor children with a deceased parent who meet specific ownership, occupancy and and asset requirements. This clause allows for an exemption of $175 which may increase annually if your town or city has approved such increases. There are many eligibility requirements for this exemption which can be found by clicking this link for the Taxpayer’s Guide to Local Property Tax Exemptions for Seniors, Surviving Spouses, and Minor Children of a Deceased Parent. Also see links below for more specific information from your town.

Veterans

Clauses 22, 22A, 22B, 22C, 22D, 22E and 22F provide exemptions to some veterans, their spouses who own the domicile and their surviving spouses, and some surviving parents and spouses of active duty military personnel who died during or due to military service. Clauses 22, 22A, 22B, 22C and 22E allow for an exemption of between $400 to $1,500, and Clauses 22D and 22F provide full exemptions. As with other exemptions, there are several qualifying factors and documentation is required. Please click this link for the Taxpayer’s Guide to Local Property Tax Exemptions for Veterans and see links below for specific details from your town’s assessor.

Resources

Below I have included links to many Hampden County towns and cities as well as a couple larger Hampshire County towns so you can research the specific qualifications for these exemptions in your town, as well as access the applications if needed. Simply click on the name of your town and a separate page will open directly to that’s town’s information on personal exemptions. If your town is not listed below and you need help finding more information please let me know and I will gladly do whatever I can to direct you to the appropriate resource

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2022 Was The Year Of Historic Inventory Shortage

Posted on January 3, 2023 by Mike Perry

By Michael Perry, Certified Residential Appraiser

mperryappraisal.com

01/03/2023

When the ball dropped on New Year’s Eve it closed the books on 2022 and locked in some historic housing data. There has been an inventory shortage for some time now with demand far outpacing supply which has kept real estate values afloat despite rising interest rates, staggering inflation, and an overall economic picture which leaves many feeling unsure of what the future holds. As we approach the 3-year anniversary of the pandemic outbreak the housing market continues to show lingering effects with the stubbornness of a toddler who refuses to eat his vegetables.

Big Picture: Annual Data

To try and explain just how historic the past year was, let’s first look at big picture stuff. Over the entire year there were 4,202 single family homes listed for sale in Hampden County which was 12% lower than the prior year, 19% lower than the prior 5-year average, and nearly 24% lower than the prior 20-year average.

There will always be an ebb and flow in the housing industry given the multitude of factors which influence it. We see the incredible surge in listings for the years leading up to the housing collapse in 2009 as homeowners took advantage of rapidly increasing property values, followed by a significant decline which lasted several years during the recovery. The past 10 years or so have shown modest changes year-to-year until the pandemic in 2020 disrupted the market and slowed activity, creating an enduring “seller’s market” which spurned a spike in values due to limited supply and strong demand.

As would be expected, the number of single family sales plummeted last year as well. The sales volume in 2022 (3,721) declined 14% from the prior year (4,334) and was more than 12% lower than the prior 5-year average (4,244). So while low sales volume was a part of the story in 2022 it is a direct reflection of the historically low inventory which truly was remarkable.

Smaller Picture: Monthly Data

As incredible as the annual data is regarding the lack of inventory, when we look more closely at the numbers from last year the scope of just how historic it was becomes much more clear. In an attempt to illustrate just how incredible this data is, I looked back over the prior 20 years to create some historical context. Here are some fascinating statistics about monthly data in 2022:

7 of the 12 months had the lowest number of new listings for that month since at least 2002 including the last 5 months of the year (January, March, August, September, October, November and December)

No month ranked higher than the third most listings for that month over the past 21 years and only 3 months (February, May and July) were that high on the list

Total listing volume for 3 of the months was more than 30% lower than the prior 20-year average for that month (January: -35.5%; October: -33.4%; December: -34.2%)

11 of the 12 months had more than 16% fewer new listings for that month compared to the prior 20-year average (July: -9.8%)

Only 1 month (February: 289) had more listings than the prior year for that month (272)

The 158 new listings in December was the lowest number of any month over the past 21 years

I realize that’s a lot of statistics and data however the historical perspective is simply stunning. There were fewer new listings in seven months last year than in any other year for that respective month since 2002, including the last five months of the year. That’s remarkable. Consider how this will affect closed sales through the winter.

December had fewer new listings than in any of the 251 prior months, and perhaps the fewest ever since I ‘only’ looked at every monthly total since January of 2002. The historic nature of this can’t be overlooked and should concern everyone in the real estate industry, especially when we consider that 7 of these 158 listings have already been withdrawn or canceled, 6 of these listings have sold, and 59 of them are under agreement or contingency. 18 additional listings have been added during the first few days of January, and there are currently 270 active single family listings in all of Hampden County (as of this writing) and its population of roughly 463,000 people, according to the U.S. Census Bureau.

Given an absorption rate of approximately 310 units per month (average units sold per month over the past 12 months), there is a current supply of 0.87 months. This means there is currently enough supply to satisfy just 26 days of buyer demand, indicating that we are still in a significant under supply situation in Hampden County as a healthy balanced housing market would have roughly 2 to 5 months of supply available. Does this mean prices will rise? Perhaps because of basic economic supply and demand principles, however recent data is telling us that values have remained relative flat for an extended period of time and have actually declined off the highs from the past summer.

Future Picture

Coming off 5 consecutive months of historically low listing volume, it would not be a surprise to see this trend continue through the winter months. There are some factors which seem to point towards a more normal market, such as the recent decline and leveling of mortgage rates, stable home prices, and painfully slow inflation relief. However, we must also consider that many owners purchased their current home over the past few years and are locked in to historically-low interest rates and therefore may be hesitant to give those rates up in favor of a higher rate for a higher-priced alternative property. The inventory issues we face are not unique as much of the country is dealing with the same, as evidenced by the nationwide decline over the past 5 years and the very low mortgage application rates.

All we can really do is wait and see, and hope there are no big surprises which could negatively affect the housing market. I am entering my 21st year as a professional appraiser and the one thing that has remained constant over those years is the proverbial holding of the breath as we wait to see what the spring brings. There are a lot of questions to be answered: Will this be the year that people are finally ready to sell their home? Will the sky-high rental rates drive more people to purchase homes? Will housing prices decline to a point of affordability for those renters and other middle- and low-income earners who have been edged out of the market for many years? Will there be a long-awaited uptick in new construction to supplement supply and help meet the demand? Only time will tell.

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Top 5 In The Pioneer Valley For 2022

Posted on December 30, 2022 by Mike Perry

By Michael Perry, Certified Residential Appraiser

mperryappraisal.com

12/29/2022

As the year comes to an end it’s always fun to look back at the real estate market. We now have another entire year’s worth of data to analyze and only time will tell how it fits in to a larger picture, but for now let’s look at some of the most unique sales of 2022 in the Pioneer Valley as we countdown the top 5 largest acreage properties, highest sale price, and smallest homes.

You’re Gonna Need A Bigger Lawnmower – The 5 Largest Acreage Properties

A buyer looking for a large acreage property should probably head north on 91. There were 3 sales in Hampden County with more than 100 acres however 5 of the 6 largest properties sold this year were located in Franklin County, with the largest located in Hampshire County.

As with many acreage properties, 829 West St has incredible views, an abundance of privacy, and several unique features including an indoor lap pool and an enclosed greenhouse. While these types of properties are not ideal for trick-or-treating they generally offer peace and tranquility to the owners.

829 West St; MLS #73008284
829 West St; MLS #73008284
829 West St; MLS #73008284
829 West St; MLS #73008284
829 West St; MLS #73008284
829 West St; MLS #73008284

The acres listed above have been rounded and represent data found in each respective listing. This list only includes properties which were listed in the MLS and which had existing single family improvements. There were several vacant land sales this year which were larger in size including 43 West St, Goshed (401 acres), 0 Main St, Ashfield (268 acres) and 82 Bromley Rd, Huntington (242 acres). These are massive parcels which often have a variety of development potential which is subject to zoning restrictions, environmental studies, topography, financial feasibility, local demand, and other factors.

That’s A Lot Of Cheddar – The 5 Highest Sale Prices

The Pioneer Valley offers some of the most affordable housing in the entire state. Whether it’s the Berkshires, the Boston Metro area, the Cape and Islands, or even central Mass which offers reasonable access to all this state has to offer, there are lots of higher priced areas here in Massachusetts. But the I-91 corridor does have some unique marketability factors which often drive prices into the 7 figures including our colleges and universities, the bucolic attraction of the landscape, and the history and culture found in many of our cities and towns. Here are the 5 highest priced sales in the Pioneer Valley this year:

Perhaps the most interesting part of this list is that there are different reasons why these properties commanded such high prices. There is 829 West St which topped the list for largest acreage property sales with its 231 acres of land, and the buyer of this property likely valued the land and unique elements of the house and amenities. And then there are two sales of properties with barely more than a half acre where lot size clearly didn’t drive their value, but rather a combination of location and specific appeal. 56 Crescent St is located in Smith College area which tends to drive prices higher, and also includes a 918 square foot 2-story carriage house with kitchen, bathroom, living area and two bedrooms. Imagine the possibilities and the unique utility this property offers to the right buyer. 43 Beacon St is located further from the hot downtown area in the Florence section of the city but just close enough to entice buyers. This property was built in the 1800’s and has been beautifully renovated, and offers over 4,500 square feet of above-grade living area and another 700 square feet in the finished basement.

The top two sales on this list offer a combination of several value-adding factors including massive homes, larger than typical site size, and unique design with many features. 655 Ridge Rd provides stunning views and more than enough acreage for privacy while enjoying them. Its nearly 10,000 square feet of living area are designed with good quality architecture and materials and if that’s not enough then the 3,000 square feet of additional finished basement area provides additional space. Add in the 4 fireplaces, 3-car garage, sauna, inground pool and large stone patio with fireplace and built-in grill with million-dollar views and you have yourself the second highest price paid for a single family property this year.

655 Ridge Rd; MLS#72942022
655 Ridge Rd; MLS#72942022
655 Ridge Rd; MLS#72942022
655 Ridge Rd; MLS#72942022
655 Ridge Rd; MLS#72942022
655 Ridge Rd; MLS#72942022

The highest price paid in the Pioneer Valley during 2022 was $2.35 Million for 18 Blueberry Hills Rd, Westhampton. This property has been listed several times since 2018 with an asking price as high as $3.8 Million. The many years it took to sell this property is probably due to its uniqueness and perhaps a little stubbornness on the part of the seller to accept a market value price. When I say ‘unique’ I mean it. Check out the features of this property:

10 Blueberry Hills Rd; MLS#72953070
10 Blueberry Hills Rd; MLS#72953070
10 Blueberry Hills Rd; MLS#72953070
10 Blueberry Hills Rd; MLS#72953070
10 Blueberry Hills Rd; MLS#72953070
10 Blueberry Hills Rd; MLS#72953070

This 5,000 square foot house has very high quality architectural design elements and thousands of additional well-finished area in the basement. Outside there are multiple decks and patios, an inground pool, and a large horse barn with multiple stalls and multiple riding rings. The paddock spanning a huge portion of the yard provides tremendous area for horses and other animals to roam, while the home is sited to provide amazing panoramic views. So yes, it took a while to sell this home but a property like this requires finding the right buyer who will value all it has to offer, and they finally found that buyer in 2022.

Up In My Kitchen – The 5 Smallest Houses

There has been a lot of talk about the tiny house movement for the past 15 years or so. Tiny homes are generally considered to be around 500 square feet or less while offering the basic necessities such as a functional kitchen, a bedroom or two, a bathroom (or outhouse) and a general living area. The reasons people want to downsize so drastically vary. Some desire to lead a simple life, some want to minimize their impact on the environment, and others do it out of necessity because of their financial situation. In my experience of having worked as an appraiser for over two decades, one of the most common reasons people buy these small abodes is because of location and the physical constraints it creates.

In a nutshell I’m talking about waterfront homes and cabins in the woods. I’ve discovered countless miniature castles nestled along the shore of a lake or pond, many of which were built long ago as a seasonal cabin for a summer getaway. They often have a wood stove and knotty pine interior, are built from logs or other wood sources, and usually have a rudimentary basement if any at all. And little homes in the woods are often former hunting cabins which have been altered over the years to provide year-round living conditions such as a permanent heat source and running water, usually obtained from a private well and septic system.

If you want to read more on tiny homes here is an article from Realtor.com which goes into some details. Whatever the reason, tiny homes are more common now than ever before and here’s a look at the five smallest homes sold in 2022.

#5 – 203 Lands End Dr, Tolland (512 SqFt)

This little cutie is located on the shores of Otis Reservoir. The wood shingle-sided home appears to have an open interior layout with no traditional bedrooms as there are two beds lining the living room wall in the listing photos. There is a bathroom and a small but functional kitchen, a wood stove to keep occupants cozy, and a beautiful vaulted knotty pine ceiling with exposed beams. As with many waterfront homes there is no basement however the bonus here is the garage and small storage shed. This property sold for $630,000 ($1,230/SqFt) in August of 2022 which, by far, makes it the highest price per square foot of the homes on this list.

203 Lands End Dr; MLS #72974043
203 Lands End Dr; MLS #72974043
203 Lands End Dr (Assessor’s Sketch)

#4 – 48 Dubois St, Springfield (504 SqFt)

Purchased in June of 2022 for $175,000, this completely remodeled 2 bedroom, 1 bathroom tiny home in Indian Orchard offers very small rooms but all of the utility necessary to live comfortably. One of the benefits of buying such a small home is that it leaves more usable space on the 5,000 square foot lot than for larger homes.

48 Dubois St; MLS #72978469
48 Dubois St; MLS #72978469
48 Dubois St; MLS #72978469

#3 – 9 Birch Dr, Shutesbury (480 SqFt)

If you’re not sure where Shutesbury is then you’re probably not alone. Incorporated as a town in 1761, this rural Franklin County community has a population of just 1,563 as of 2021 and is comprised mostly of undeveloped wooded space. Lake Wyola offers waterfront property for second homes and permanent residents, and 9 Birch Dr is within walking distance. Its purchase price of $145,000 in August of 2022 is the lowest on this list but despite being built in the 1960’s this home appears to be in good overall cosmetic condition. As with many lake community homes and ‘cabins in the woods’ this property does not have a permanent heating source which could prevent buyers from obtaining traditional financing, however the big bonus with this property is the full basement which is partially finished. The board & batten siding, wood deck, and wooded 16,500 sqft site – the largest site of all homes on this list – make this little home by the lake a great option for someone looking for a second home.

9 Birch Dr; MLS #73005189
9 Birch Dr; MLS #73005189
9 Birch Dr; MLS #73005189
9 Birch Dr; MLS #73005189

#2 – 3 Inlet Dr, Holland (480 SqFt)

This is another waterfront property which serves more as a cozy place to stay on the water than as a permanent residence, however it would be a great place to wake up every morning. This street is aptly named as the house sits on an inlet which provides access to beautiful Hamilton Reservoir, a very popular full recreation lake. The size of this house is equal to #3 on this list however I have put this in the #2 position because its lot is less than half the size at around 6,100 square feet. This home appears to be dated and reflects its age (built in the 1960’s) and its purchase price of $176,050 in July of 2022. However, the views from the deck and the nature which surrounds the house are appealing.

3 Inlet Dr; MLS #72993181
3 Inlet Dr; MLS #72993181
3 Inlet Dr; MLS #72993181

#1 – 319 Wendell Rd, Warwick (456 SqFt)

The tiniest home sold in 2022 in the Pioneer Valley is this 456 square foot cottage just steps from Moores Pond in quaint little Warwick, MA. In case you’re not familiar with where this town is located, it’s north of Route 2, east of I-91, and borders New Hampshire to the north, and is surrounding by a bunch of other towns you’ve probably never heard of. The home itself may be smaller than your living room, measuring just 24′ x 19′, however the water access is why someone would purchase this property. The interior decor of this home has a ‘rustic cabin in the woods’ vibe and there is no permanent heat source which, as mentioned above, could prevent a buyer from obtaining traditional financing. Its sale price of $150,000 in July of 2022 likely reflects its condition however this home has potential to be a great tiny house by the water.

319 Wendell Rd; MLS #72989258
319 Wendell Rd; MLS #72989258
319 Wendell Rd (Assessor’s Sketch)
Image obtained from Google Maps

So there’s a look at some of the sales this year throughout the Pioneer Valley. As an appraiser, when I hear words like biggest or smallest it sends shivers down my spine because of the challenge it may pose due to lack of comparable properties. But also as an appraiser I appreciate interesting and unique properties so researching data for this post was more fun than appraising these kinds of properties. I fully acknowledge that these lists may not reflect private sales which occurred outside of the MLS, and that some of the data may not be fully accurate as it was obtained from the MLS with minimal verification by myself, however it’s meant to be all in fun as we look back on the last year and prepare to move forward to 2023.

I hope everyone had a joyous holiday season and I wish you peace, happiness and much prosperity in the new year!

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Unwrapping New Homes; A Look At Trends In New Construction Sales And Prices

Posted on December 21, 2022 by Mike Perry

By Michael Perry, Certified Residential Appraiser

mperryappraisal.com

12/21/2022

New construction homes are unique within the real estate industry and there is often a difference in trends between new and existing homes. They also present unique challenges to appraisers due to several factors, including the relative scarcity of new home sales to use as comparables and the lack of information available to verify important aspects of those sales. New construction sales frequently occur outside of the traditional public marketing methods such as the local multiple listing service (MLS) which makes it difficult for appraisers to analyze trends or even discover those sales at all. It is also not uncommon for a buyer to purchase vacant land and then hire a contractor to build their new home, and appraisers are prohibited from using comparables which require combining land value and construction cost.

Many times when appraising a new construction home, the appraiser will be asked to complete the assignment before the home is complete, and sometimes before it has even been started. In these scenarios the appraiser must rely on plans and specifications for the proposed improvements, as well as information from the builder and/or borrower. It is not uncommon for plans to change during the home building process which further complicates the appraisal as what gets built may not be what the appraiser developed his opinion of value on. For example, the buyer may decide they’d rather extend a wall to create more living area, or the builder may encounter a scenario in which alterations must be made due physical challenges (ie; inability to excavate) or legal reasons (zoning issues, local codes, etc). So if the appraiser has completed an appraisal based on proposed plans, and then what is built does not match those plans, the appraiser’s opinion of the property’s value may not reflect its actual value. In these cases the lender may need to order a new appraisal to determine the market value of the property as constructed.

I have appraised dozens or perhaps hundreds of new construction homes over the past 20 years and in my experience what presents the greatest challenge is the lack of data available, and the difficulty in verifying details of each sale. In developing our opinion of value for new construction homes, we predominantly rely on two different approaches: the cost approach and the sales comparison approach. The cost approach considers the cost to purchase the land and build the improvements less any physical, functional or external depreciation. For new homes, there is no physical depreciation and rarely any functional obsolescence, however sometimes we may need to factor external influences into the value such as a busy road, close proximity to an airport or highway, or other factors outside of the control of the property owner. This approach also considers the quality of the home and materials, entrepreneurial profit (expected profit by the builder), as well as local issues and building codes – imagine the difference in construction standards between tornado alley and, say, Minnesota or Alaska. So all of these factors and more are considered when developing the cost approach to value, and then the appraiser must determine market influences specific to that property such as supply and demand.

The sales comparison approach considers comparable sales and allows the appraiser to compare the property being appraised (the subject property) to other similar homes which have recently sold. It is critical that the appraiser utilize sales of other new construction homes if possible because of the Principal of Substitution. In the interest of time I have linked to an article by my friend and professional colleague Tom Horn, a 30-year veteran appraiser, to help explain the Principal of Substitution. This is where the challenges noted above come into play. With roughly half of all new construction sales occurring privately and outside of the MLS, and only about 1.3% of all sales in the MLS being new construction properties, appraisers can have difficulty finding enough reliable data on which a reliable opinion of value can be developed. Now consider things like builder incentives and the lack of public record data available for newly-built homes to help verify gross living area and other pertinent information, and you can probably start to understand how new construction properties present unique challenges to an appraiser.

If you’re still reading this then I appreciate you. I had no intention of creating such a long post however I think it helps agents, builders, and buyers understand the appraisal process and challenges for new construction homes.

The chart below shows the number of new construction sales in Hampden County by year. As noted above, it’s important to keep in mind that only about half of all new construction sales are listed in the MLS while the other half are sold privately or are built by those who already own land.

On average, there are 48 sales of new construction single family properties annually listed in the MLS, which is represented by the red line in the chart above. We have been hovering above this average for the past 7 years which is likely a reflection of diminishing inventory of existing homes available for sale. You may recall that the cost of building materials skyrocketed for a period following the pandemic and this article by the National Association of Home Builders notes that costs increased 26% for the 12-month period between June 2020 and June 2021. It is likely that the increased cost to build stifled the number of new homes around this time.

To analyze local trends in new construction, I considered data from three Hampden County towns with the most sales which includes Springfield, Westfield and East Longmeadow. Let’s look at East Longmeadow first.

Median prices ebbed and flowed but remained relatively stable from 2010 through about 2018, and then began to soar for the next few years before cooling again this year. Given the limited number of sales it’s wise to be cautious when looking at these trends as size, quality, location, and other factors could influence median prices among so few sales. Perhaps a more reliable analysis is to consider price per square foot paid, as noted below.

When looking at price per square foot we see a modest and steady increase over time with exponential growth over the past few years. This year buyers of new construction homes paid about 50% more per square foot ($262.54) than did buyers of these homes 10 years ago ($171.97), and the median price paid this year ($480,000) is 50% higher than the median price paid 10 years ago ($319,000).

Now let’s look at Westfield where again we’ll consider median prices and median price per square foot:

The trends in Westfield are similar to those in East Longmeadow. We see a dip in price per square foot for 2015 however there was only 1 sale in that year listed in the MLS, therefore it’s reasonable to disregard it as an unreliable indicator. Overall, prices for new construction single family homes in Westfield have steadily increased over the past 12 years with relatively limited volume.

Finally, here’s the data for Springfield which is the city with the most sales in MLS records.

As with all data presented here, the median prices paid have several factors baked in. Springfield has a diverse housing market and many unique neighborhoods, some of which command higher values. There are also several different builders who work in Springfield and each brings their own level of quality which could influence prices paid. That said, prices have increased at a rather significant pace since 2010 and the median price paid this year ($403,000) is 156% higher than in 2012 ($157,200) but is lower than the median price paid last year ($414,500). Remember, prices paid reflect all factors including size, location, quality, and utility such as bedroom and bathroom count, amenities like garages and central air, and other factors therefore it’s possible that buyers paid more last year because those homes were larger, for example.

The trend in price paid per square foot mirrors the trend for median price. The median price per square foot paid for the 11 sales in 2022 ($222.22) is 108% higher than for the 16 sales in 2012 ($107.08) and is nearly 15% higher than the median price paid last year ($193.67).

So that’s a look at trends in new construction single family homes for Hampden County. This data is challenging to analyze due to the limitations noted above, and appraising these properties can be equally as challenging. My advise to agents and builders who may read this is to be willing to speak with appraisers about past sales in which you were involved. Make appraisers aware of other new construction sales which were not listed in the MLS and be willing to provide details such as finished above-grade living area, quality of construction, amenities, and any other relevant details such as incentives and upgrades. Let us know who paid for upgrades and whether they were included in the transaction price or paid separately.

Help us understand marketing factors you have experienced with new construction homes in the area. Is there high demand? Do buyers tend to want higher quality for a higher price or are they scaling back to lower the price? Are they more likely to want extra features such as the second garage stall, air conditioning, or a finished basement? And what are current trends among buyers of new construction homes.. are they still expecting granite counter tops or hardwood floors or custom master bathrooms? Keeping an open line of communication with appraisers can help us do our jobs more efficiently while providing the most reliable appraisals to our clients, and can help everyone involved by ensuring buyers, agents, builders and lenders have the most accurate data.

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Data and Charts! A Look at Year-Over-Year Data for November and 2022 Price Distribution

Posted on December 9, 2022 by Mike Perry

By Michael Perry, Certified Residential Appraiser

mperryappraisal.com

December 9, 2022

Here’s a look at how the local housing market performed in November compared to last year.

Greater Springfield data includes the towns of Agawam, Chicopee, East Longmeadow, Holyoke, Longmeadow, Ludlow, Southwick, West Springfield, Westfield & Wilbraham.

And here’s data for Springfield

Over the past year, more sales of single family properties in Hampden County occurred in the $200,000 to $299,999 range, and the second most common sale price was in the $300,000 to $399,999 range. The median sale price during 2022 (as of December 9) was $290,000 and the average was $324,261. Here’s a look at the overall price distribution for sales of single family properties during 2022.

Hampshire County saw the bulk of its sales occur in the $300,000 to $499,999 range. The median and average sale price was $402,000 and $448,144, respectively. Here’s the overall price distribution.

Franklin County is more rural in nature and typically has lower sales volume compared to other Pioneer Valley counties. Most sales in this area during 2022 occurred in the $200,000 to $399,999 range, with a median sale price of $310,000 and an average price of $339,527.

We’ll include Worcester County as well since it’s nearby and competes with some Western Mass communities. Typical single family sale prices are higher in Central Mass with the most common sale price in the $300,000 to $499,999 range during 2022, with a median price of $425,000 and an average sale price of $486,157.

And here’s a look at the price distribution for 2 to 4 family properties throughout Western and Central Mass. There is a relatively low number of sales in Hampshire and Franklin County than Hampden County, and many more of these sales in Worcester County. The median sale price in each county during 2022 is: Hampden $295,000; Hampshire $335,000; Franklin $269,500; Worcester $425,000

I’ll update this data once the year is over and include total sales volume in addition to prices. We’ll also go more in depth on price trends and other conditions as we look back on 2022.

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Supply And Demand

Posted on December 6, 2022 by Mike Perry

By Michael Perry, Certified Residential Appraiser

mperryappraisal.com

December 6, 2022

As the year winds down it’s always interesting to look back at trends which emerged, continued, or changed in the housing market. Here’s a brief look at some key supply and demand factors which have affected our local housing market.

After multiple years of persistent low inventory and strong demand, 2022 brought much of the same.

As of this writing there have been 4,084 single family properties listed for sale in Hampden County during 2022 which means we will end this year with fewer properties being offered for sale than in any other year going back at least two decades. Limited supply, when coupled with demand, often leads to increasing property values, which we have seen over the past few years as this trend has persisted.

When looking at the two graphs above it becomes apparent that as inventory started to decline at the onset of the pandemic in early 2020, values have increased at greater rates than years prior.

As a result of the inflationary pressures being felt by nearly everyone, the Federal Reserve began raising interest rates at the beginning of the year. The Federal Reserve does not control mortgage rates, of course, but changes they make to the short-term rates among lending institutions typically manifests in similar changes to longer-term interest rates, such as mortgage loans, as the lenders must charge more to pay their own loans and remain profitable. Increasing mortgage interest rates have been one of the most significant trends of the past year.

At the beginning of 2022 rates were around 3.2% but rose very quickly throughout the year and peaked around 7%. As of the end of November the average 30-year fixed rate mortgage was 6.5% which may be an indication that investors expect the Fed to ease off with aggressive rate hikes, however only time will tell. Consider the graph below for more context on current rates.

Current interest rates are at their highest levels since 2008 and the early stages of the housing collapse, however the factors present in our current economy are vastly different and there’s no reason to expect a similar outcome.

The final supply and demand issues I’ll discuss involve actual buyer and seller activity in our market. The data we get from listing activity can be a window into current conditions, and help identify current or emerging trends. First, let’s consider the number of listings which have had price reductions.

A price reduction is the lowering of the price of a property from the original price when it was listed for sale. The chart above includes all listings in Hampden County whether they sold, are currently active, or were taken off the market. The first thing I notice is that the number of listings with a price reduction in 2022 is higher than in 2021. There may be several reasons for this increase including higher interest rates and lower effective buying power, concerns over the economy and the future, or simply a concern about current values being overinflated and unsustainable. While it’s also possible that sellers have become too aggressive with initial asking prices, this more reliably gives us insight into buyer sentiment and overall demand.

I included several other years for the purpose of context as there has been ongoing volatility for several years now. The data above falls in line with so many other conditions we have seen over the past 5 years and seems to make sense. The 3-year period prior to the pandemic shows a very consistent number of listing with reduced prices, hovering around 40%. During the Covid year of 2020 we saw this metric change drastically and this trend continued through the following year. This is likely due to the limited supply and strong demand which caused buyers to become less picky, and more likely to pounce on new listings which they may have passed over in the past while waiting for more properties to become available. But the change of course this year with a higher percentage of listings requiring a reduced offering price may be indicative of yet another emerging trend where buyers are hitting the pause button and becoming slightly more selective while also being less likely to pay at or above the initial asking price.

This final chart shows the trends of marketing time over the past five years. Marketing time above is expressed as days to offer (DTO) which is the number of days between the listing of a property for sale and the date on which the seller accepted an offer. Average DTO always tends to be higher than median as some listings can linger for long periods which drags the average higher, while the median DTO only considers that as a single data point on the higher end. Some people prefer to rely on one or the other, therefore both average and median DTO have been included.

We can see there was a modest trend taking place in the years leading up to the pandemic in which marketing time was steadily declining, however this trend was immediately exacerbated once Covid entered the equation. For those who are relative new to the housing industry, either as an agent, appraiser, investor or mortgage lender, you may have been led to believe that homes selling in a few days is a normal thing. It was normal for a couple years however in the larger scope of the housing market those conditions were by far an extreme outlier. For reference, when I started my appraisal career in 2002 the typical marketing time was about 30 to 60 days. It was totally normal – and expected – that if you wanted to sell your house it may take up to three months before receiving an offer you were willing to accept. Fast forward to today and that three month “normal” has shrunk to less than three weeks, and oftentimes sellers were receiving a dozen offers or more within the first few days their property went live in the MLS.

Getting back to the current year, it’s interesting to note that marketing time in 2022 did not experience the same declining trend which was present for at least the prior 4 years. Average and median DTO in 2022 was nearly identical to the prior year, and marketing time for current pending sales appears to indicate that this number will rise going forward. It should be noted that not all pending sales will consummate into a closed transaction, and that our local market is seasonal so extended marketing times around the holidays and winter months is not uncommon.

So that’s a look at supply and demand over the past year. Some trends have continued (low inventory), some trends have emerged (rising interest rates), and some trends have cooled (marketing time). What does the future hold? Sorry, you’ll need to check with a psychic for that, or perhaps just keep watching The Simpsons.

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The Extraordinary Housing Market

Posted on November 29, 2022 by Mike Perry

By Michael Perry, Certified Residential Appraiser

November 29, 2022

Beyond Ordinary

Merriam-Webster defines “extraordinary” as:

Extraordinary (adjective): going beyond what is usual, regular, or customary; exceptional to a very marked extent

merriam-webster.com

The past few years have been a wild ride in the real estate industry. That statement isn’t exactly a hot take but it’s worth stating because of how wild this ride has been. June marked my 20th year as a licensed real estate appraiser so I have adequate context with which I can make that determination. For the first few years in this industry I witnessed the incredible housing boom from 2002 through 2005, then the housing collapse which had lingering effects for several years, then what felt like a normal housing market for about 7 years until the pandemic changed everything.

What is so remarkable about the housing market over the past two decades is the significant short-term value swings. The chart below shows year-over-year changes in median sale prices for single family properties in Hampden County:

This chart shows annual differences in median sale price compared to the prior year. For example, the median sale price in 2004 was 10.1% higher than the median price in 2003, and the median price in 2005 was 12.1% higher than the median price in 2004.

From 2002 through 2005, median prices increased at more than 10% per year. That’s incredible. Prices during this period peaked in 2007 with a median sale price of $192,000 that year which was an increase of 41% compared to the median price of $136,000 in 2002.

The housing collapse hit in 2008 and sparked an economic downward spiral throughout the country and world. Median prices in Hampden County declined in 4 of the next 5 years to a low point of a $160,000 median sale price in 2012, a total decline of 17% from the 2007 high. For many homeowners, this event erased all of the equity gained over the previous 8 years or so, and for many others who purchased a home or refinanced to cash out equity during the run-up in values, it led to financial ruin.

From 2013 through the beginning of 2020, the housing market stabilized and produced more modest but consistent gains. Aside from 2016, median prices rose between roughly 2% and 6.5% annually and mortgage interest rates also remained relatively stable between the low 3’s and low 4’s (click here to check out historical interest rates). Once Covid entered our lives it upended all iterations of normalcy and the housing market reacted erratically. Median prices jumped 10.5% in 2010 and another 13.2% in 2011 as demand significantly outpaced supply and interest rates plunged below 3%. As of this writing, the median sale price in 2022 has increased 9% compared to last year which indicates a higher but slowing housing market. I’ve heard this situation described very well by an appraiser named Ryan Lundquist in which he said, and I’m paraphrasing, that it’s like going 95 mph down the highway and letting off the gas a little – you’re still speeding but at a slower rate. Ryan often has a profound take on what’s going on in the housing market. He also happens to be a brilliant appraiser and a helluva guy. Check out his outstanding blog at sacramentoappraisalblog.com

To The Moon

If you were working in the real estate industry prior to the housing collapse then you probably remember how nearly everyone referred to the rising values as ‘unsustainable’. As prices climbed, most of us shook our heads in disbelief over what people were willing to pay and wondered how long it would take – if ever – to reach those plateaus again. Through the magic of hindsight and the patience of a saint, we now know the answers to these questions.

Average sale prices in Hampden County peaked in 2006 at $219,458 and median prices peaked in 2007 at $192,000. Eleven years later in 2018 each of those high water marks were surpassed with an average price of $224,270 and a median price of $200,000 and prices have continued to soar far beyond these points.

What has happened over the past 3 years was completely unpredictable and remains somewhat mind-boggling. The metrics behind this data makes sense and at its core it really just comes down to basic economic principles. Supply and demand drives markets and since early 2020 we have seen a steady trend of low supply paired with strong demand. It really is as simple as that from a fundamental standpoint, however the ancillary factors make it somewhat mysterious, at least to me.

I’m referring to the crippling inflation, skyrocketing interest rates throughout this year, and broad economic uncertainty caused by these and other factors. Yet despite these apparent red flags, the housing market continues chugging apparently unaffected by the noise. Here’s a look at the correlation between mortgage rates and median sale prices over the past 12 months:

In addition to the correlation between rates and prices, it’s important to note that although median prices for 2022 are higher than in 2021, prices have steadily declined since June. As we head into the winter months when our local market traditionally experiences a seasonal slowdown, it will be very interesting to monitor whether this trend continues. It is entirely possible that the spring will bring a new upward trend in prices, however it’s equally possible that the economy, inflation, and higher interest rates will stifle prices going forward.

About That Inventory

While property values typically dominate most conversations about the housing market, the proverbial elephant in the room has been the lack of inventory. This issue has persisted with impressive consistency over the past few years and the number of new listings in 2022 is critically low. As of November 28th we have seen fewer new single family listings than in any other year going back at least the past two decades.

When compared to the same time period – January through November 28 – this year has produced the fewest new listings by far. The 4,025 single family homes listed for sale in 2022 is 23% lower than the average over the past 20 years (5,237) and is 11% lower than the past 10-year average (5,029). The lack of inventory has also led to a decline in overall closed sales and the 3,383 single family sales in 2022 is 11.5% lower than the previous year when there were 3,824 sales through the same period.

So that’s my take on the local housing market and the key factors involved, namely the upward trend in prices and downward trend in supply. While I never make predictions about future conditions, I’m always reminded that the housing market can be volatile and tends to run in cycles. 2022 marks the 10th consecutive year of increasing housing prices and I’ll leave it up to the economic experts to predict when the cycle will change course.

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