Marc's Mortgage Matter's

Congress passed a bill last weekend, and President Obama signed it, that allows the FHA to back mortgages of up to $729,500, six weeks after the limit dropped to $625,500. The move makes it easier for more buyers to get low-interest FHA loans. Obviously members of Congress had trouble letting Freddie & Fannie take on any more risk given the billions in taxpayer money that have gone their way. The two agencies are politically toxic, but legislators felt pressure to re-raise the limit, so compromised by raising the FHA limit. Loans backed by Fannie Mae and Freddie Mac will continue to have a $625,500 limit. Loans that exceed the Fannie, Freddie and FHA limits move into the jumbo realm, as we know, where 30-yr mortgages carry higher interest rates and require 20% or more down. FHA programs usually allow lower down payments and are more forgiving of imperfect credit, but also carry higher fees, so more-affluent buyers tend to prefer Fannie and Freddie loans when they qualify for them. Critics are quick to wonder about extending a high LTV loan at a low interest rate under the FHA program rather than a Fannie or Freddie program, but so be it.

If you changed residences between 2010 and 2010, congratulations: less than 12% of the U.S. population moved during that time, the lowest recorded rate since the Current Population Survey began collecting statistics on the movement of people in the United States in 1948. The recent peak was in 1985 (20%). If folks move more than 500 miles, the majority do it for employment-related issues, and if folks move less than 50 miles, the majority do it for housing-related reasons ("My mudda-in-law was driving me crazy!"). Per the survey, of the 45 million people who lived in a different house within the United States, almost 7 million lived in a different state, with the top being CA to TX, NY to FL, FL to GA, CA to AZ, NJ to PA, NY to NJ, CA to WA, TX to CA, GA to FL, and CA to NV.

Like the term “sale” in discount retail stores, the term “market value” in valuation gets misused on a regular basis. In fact I’d characterize some of the misuse as manipulation.

I think of market value in housing as some sort of perishable fruit or vegetable. It has a limited shelf life of reliability.

Here’s an obligatory definition of market value as presented on the Fannie Mae single family appraisal report form, by far the most widely used report in residential valuation:

The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.

Then of course there are many other uses that are thrown into the same caldron of confusion:

Appraised value – the value on an appraisal report
Investor value – value of the property is to a specific individual or entity – not necessarily market value
Fair market value – an accounting term, “old school” market value name and commonly used within the legal system
In layman’s terms let’s talk about how “market value” is being misused.

When a home is properly exposed to the market (listed so buyers can see it in a reasonable period of time), it sells in the marketplace for its value as of that moment.

Market value isn’t precise

Hence my problem with a Zillow “Zestimate” where the presentation is an exact number for the value of a home i.e. $257,532. Perhaps that’s why this tool has long been buried in their web site after being so prominent on their home page after launch. I have never heard of a housing market today that has that kind of precision. If I appraise something for $500,000 and it sells for $505,000 or $495,000, I was spot on the money so to speak.

I see market value of a home as some sort of “range of gray” that I am comfortable with given what I know about the housing market that the property sits within and how its amenities are considered in that market.

One sale does not make a market

As crazy as it sounds, we appraised a Manhattan transaction a long time ago where the buyer was in a 5 way bidding war of a multi-million dollar listing and offered $2M above list “to avoid the stress of a bidding war and get the property they wanted.” They knew they over paid but it was worth it to them. Was this sale price a new benchmark for market value? Of course not yet it was what someone was willing to pay. That’s investor value to the buyer, but not an establishment of market value. It was worth it to them, not the market (wouldn’t we all love to be the seller in that situation?).

During the dot com boom more than a decade ago, there was a townhouse in downtown Manhattan that was purchased by a newly minted dotcom type for $12M, about 2x the market level at that time as I recall (and that was generous). That sale actually seemed to slow down the high end market for a few years within the neighborhood as sellers continued to point to that sale as establishing “market value.” As a result, many overpriced listings sat for extended periods of time until reality sank in. The sale’s impact on the market eventually dissolved and the market returned to sanity.


One sale does not make a market – in other words, market value is a product of multiple data points.

Theory of relativity
My problem with the interpretation of market value as a benchmark is how much is left out of the story when describing it.

There was an article in HousingWire the other day that said: “Freddie Mac sells record-number REO at 94% of market value” The inference in Freddie Mac’s press release is to say that “we are doing a great job, since conventional wisdom suggests that foreclosures usually sell for 15%-20% below market value.” Forgetting that type of PR manipulation for a second, I think many also would followup that initial thought with:

Freddie Mac gave away an average of 6% of the actual value of every home they sold. However in reality, they sold the property for what the market would bear. Foreclosures involved added hassle and a certain amount of unknown pertaining to the condition of the property and probability of some hidden defect because the prior owner was under financial duress. No free lunch.

Often this “foreclosure discount” is quantified by two different data sets such as comparing the prices of non-reo home sales and REO home sales. However in many cases those housing stocks are very different. We see this in Miami where the average square footage of non-distressed properties are much larger. Condos were 27% larger and single family homes were 38.4% larger in 3Q 2011.

In other words, foreclosures don’t sell at a discount. Foreclosures generally sell for market value once you factor in everything.

Foreclosures often sell for a discount from some idealistic-if-this-property-were-not-in-this-situation value but that is NOT market value.

Money on paper loss
I get the same feedback with people who think their property is inherently worth what it was at the peak of the market. When selling the property today, after proper exposure and selling at 20% below the peak, it was described as some sort of discount from its “true” market value to move on with their lives. Wrong. It sold at market value. It did sell at a discount from market value in another time but that’s apples and oranges (i.e. rotten bananas).

Extended definitions and gobbledygook aside, to most consumers and real estate professionals, market value is really a reasonable number arrived at by two parties who are fully informed.

Everyday home sellers and even entities like Freddie Mac are not in the business of philanthropic endeavors (in theory).

Jonathan J Miller

The Elliman Report: Miami Sales 3Q-2011 [Douglas Elliman Florida]
Freddie Mac sells record-number REO at 94% of market value [HousingWire]

The economy continues to show grudging signs of improvement, even as lawmakers across the globe continue to flail at the problems of a world awash in red ink. There will ultimately be economic repercussions of this outright inaction or indecision at key points, but for now we're likely to continue along on a path of modest expansion.

Both global and domestic economic troubles contribute to the low interest rate environment, as central banks keep short-term rates low while investors seek shelter for their assets, content to earn little if anything on their holding rather than expose those funds to potential loss. This in turn keeps mortgage rates on a low and even path, and for that, at least potential homebuyers and refinancers can be thankful.

Somewhat more people than expected purchased an existing home in October. The 4.97 million (annualized) rate of sale was rather stronger than the 4.9 million that was expected, and the last three months of sales have been marginally stronger than the previous three. The improvement in sales meant a reduction in the number of months of inventory on the market; the 8.0 months of stock remaining was the smallest number this year, but is arguably more due to fewer homes being posted for sale amid difficult conditions than any surge in demand. It is also expected that inventory levels will begin to rise in 2012 as a backlog of foreclosures begins to work its way to market. That will continue to pressure home prices which already are on a declining path in most areas.

The Federal Reserve released the minutes of their last meeting from early November. While there was no policy change at the end of the meeting, the minutes revealed that there were considerable discussions about whether or not to adopt specific inflation or growth targets to define the course of future policy, as well as how best to communicate the FOMC's intentions about how they intend to meet their dual mandate of stable prices and full employment. Both ideas present individual as well as collective challenges; while members agreed to consider more explicit statements about future monetary policy, moving toward fixed growth, unemployment or inflation targets and would require market belief in the Fed's intentions to hold fast to these marks, in good times and poor. Ultimately, the committee decided that what do to in both these cases was thorny enough as to make no specific decision at the moment, but it does seem likely that these topics will arise again in the future. Clearer communication seems the most likely to occur.

Bond markets were closed for Thanksgiving and open just a half-day on Friday so there was little activity of note. By Monday, we'll get a sense of how the retailer's Black Friday and weekend went, and there is a fair bit of end-of-the-month and first-of-the-month data out next week, including new home sales, the Fed's regional survey of economic conditions, ISM report, auto sales and of course, the employment report on Friday. Given the gentle upward momentum of late, we think there might be upside surprises to some of these; normally, this would be sufficient to move mortgage rates up a few basis points by the end of the week. However, the Eurozone mess is proving to be more than sufficient counterweight to any modest improvements here, and we will probably hold steady or may even shed a couple of basis points on average.

A man and his wife were having some problems at home and were giving each other the silent treatment. Suddenly, the man realized that the next day he would need his wife to wake him at 5:00 AM for an early morning business flight.
Not wanting to be the first to break the silence (and LOSE), he wrote on a piece of paper, "Please wake me at 5:00 AM" and left it where he knew she would find it.
The next morning, the man woke up, only to discover it was 9:00 AM. And he had missed his flight. Furious, he was about to go and see why his wife hadn't wakened him, when he noticed a piece of paper by the bed.

The paper said, "It is 5:00 AM. Wake up."

Men are not equipped for this kind of contest.