This post is by guest blogger and chamber member Kyle Winningham of Winningham Appraisals. Here Kyle gives us some great insights into the most frequently asked question, “how’s the real estate market doing?”
Polk County Residential Market Trend
by Kyle Winningham
A question frequently asked of appraisers is “how’s the real estate market doing?” Answering this question is difficult because of the myriad of property types and the various economic influences affecting each in unique ways. More often than not though, the question is directed toward the single family residential market. This segment is perhaps the easiest to draw meaningful conclusions from, primarily because of the abundance of data readily available. Statistical observations are only as good as the data available; however, even with a plethora of data, statistics can be misleading or convey an answer to a question sought with biased data selection. Mark Twain perhaps said it best, “There are three kinds of lies: lies, damn lies, and statistics.” The following is my perspective on the state of the single family residential real estate market set forth in the parameters unilaterally deemed most applicable and appropriate.
Most statistical reports use sales that include both market and atypically motivated sales such as foreclosures and short sales, because it takes time to vet a large population of sales. Using this information without understanding the parameters used in the analysis may lead to inaccurate conclusion as it relates to Market Value. A general analysis of Price that includes all sales tends to be what many real estate practitioners and analysts subscribe to and report, but it’s an error to rely on such misleading information. There are many publications stating the average and median home Prices, but the appraiser is most often charged with the task of determining Market Value. Relying solely upon subscription services that only report transactions of users to their service provides a smaller sample size from which to draw trends and conclusions from. As such, a 5 year analysis of residential sales was conducted by extracting sales data from the Polk County Property Appraiser’s database, which encompasses all transactions that occurred within Polk County and includes a population size of approximately 25,000. The sales were not vetted; however the search parameters were carefully chosen to ensure the highest probability of arms length transactions. The parameters of the search include residential properties with an acre or less of land, sales prices between $30,000 and $999,999, no foreclosures, and only qualified sales. A sale is not “qualified” if the sale Price does not reflect the Market Value, the sale involves multiple properties, or the sale involves family members. The results of the analysis are summarized below:
The illustration above reflects the market’s transition from sale prices below replacement cost to market equilibrium as well as increased demand evidenced by greater sales volume. Replacement cost, in this analysis, is the average total cost of construction required to replace a residential improvement with a substitute of like utility. These costs include land, labor, materials, supervision, contractor’s profit and overhead, architect’s plans and specifications, sales taxes, and insurance. A market in equilibrium will have sale prices that are nearly equal to replacement cost; however when this does occur it’s typically only in passing while the upward trend continues until the market again has a correction and pushes sale prices down. Sale prices below replacement cost indicate economic obsolescence in the market place and should present less risk to both borrowers and lenders because the market should theoretically correct itself, allowing for large equity gains on behalf of the purchaser. However, both should be wary when sale prices significantly exceed replacement costs because the difference can quickly evaporate leaving purchasers upside down on their loan and lenders potentially adding to their Real Estate Owned (REO) portfolio.
The great recession had a reverberating effect on the market which resulted in declining residential real estate prices extending through much of 2011. However, since the last quarter of 2011 market activity increased as credit markets loosened and property values and transactions have consistently increased year over year. It’s expected that as sale prices mirror replacement costs, the increases in sales prices will flatten and prices should continue to increase but perform only slightly better than the Federal Reserve’s target inflation rate of 2%. The increase will likely be somewhere between 3% – 4% following the same year over year change as replacement costs.
There are many variables contributing to stability and health of the market overall, including political factors as well as monetary policy. Currently the market is greatly influenced by the fed fund rate which is essentially the interest rate that banks charge each other for short term loans; the loans are used to meet the reserve requirement mandated by the Federal Reserve. Currently the target federal fund rate is around .025%, shown below, and has been historically low since around 2009. The average spread, the difference between the 30 year mortgage rate and the fed fund rate, before the near zero target fed fund rate was 2.66%. The current spreads are essentially equal to the 30 year mortgage rates at around 4%, so from a historical perspective, depository institutions are achieving greater returns.
It’s likely and necessary that the fed fund rate increase, at which point, a segment of potential buyers will be eliminated from the market because of the increased cost of capital and in turn decrease demand. Although this will have a temporarily adverse effect on sale prices, it will enable an environment more influenced by fundamentals rather than thrift policy.
So to answer the question, “how’s the real estate market doing?” The overall economy and local single family residential real estate market appears to have rebounded with increased sales volume and prices. New developments within the county as well as faster than projected growth from Legoland continue to contribute to the optimism and speculation in the area and Polk County is poised to continue its upward trend towards equilibrium while economic obsolescence contracts. While monetary policy can certainly affect the local market, it’s unlikely that the small increases in rates will have a drastic impact. The outlook for new development and growth is favorable in the coming years.