NEW Real Estate Bubble! Incentives Suck?

Incentives offered by builders/sellers create an inflated pricing level that will contribute to the sustained decline of real estate values and consumer confidence. I hate giving bad news, but I’m compelled to officially make that prediction. I'm not Chicken Little and I hope I'm wrong, but it’s hard to deny the details of our current market situation.

Incentives offered by builders/sellers create an inflated pricing level that will contribute to the sustained decline of real estate values and consumer confidence.

I hate giving bad news, but I’m compelled to officially make that prediction. I’m not Chicken Little and I hope I’m wrong, but it’s hard to deny the details of our current market situation.

Do appraisers traditionally spend time inside a home quantifying the value of seller upgrades for inclusion in the appraisal? Then why would a buyer accept the dollar value offered by builders for upgrades? Buyers are getting lured into homes with $50k worth of upgrades that will be worth 10% of $50k if they decide to sell the following year.

Here’s the danger I worry about: Let’s say you have good credit, a decent job, and qualify for a $550,000 FHA loan (3% down payment). That will give you a loan for just over $530,000. Let’s assume the house your want is priced exactly at $550k, but it’s not selling and neither is anything else like it.

You really love the house, but want a good deal so you offer the seller $475k. The seller is a builder that won’t budge on price; instead she counters your offer with $100k in upgrades! That would bring the house’s value up to $575 in your estimation.

Both parties benefit, correct? Yes, until you try to sell that home in a year after you get your dream job in Portland, ME.

There is plenty of reason to believe the market will continue to correct itself for another 12 months (code for “stagnate” or “decline”). The home you believed to be worth $575k is still worth the $475 you originally wanted to pay – and you have a $530k mortgage debt starring you in the face.

To make matters worse, the values of your neighbor’s homes were comp’d to your inflated purchase price of $550k; now half of your neighbors would be upside down in loans if they needed to sell, simply because you agreed to “incentives” that can’t be tracked, monitored, or accurately quantified.

Below is a list of incentives I would ask for – starting with square footage and ending with fireplaces.

What Appraisers Look For

The most obvious factor is location. After location appraisers are mainly focused on the following to determine home worth:

• square footage
• condition and age of the home
• lot size
• number of bedrooms
• number of bathrooms
• total number of rooms
• garage(s)
• decks
• screened porches
• fireplaces

Secondary Enhancements Help a Home Sell There are other bells and whistles the appraisers may factor in, but their impact on home value is marginal. Although these improvements do help the home sell, they do not impact the appraisal significantly. Examples include:

• ceramic tile
• hardwood floors
• crown molding
• chair railing
• specialty counter tops
• cabinetry
• sprinkler system
• wainscoting
• upgrades in light fixtures
• upgrades in faucets
• sinks, tubs and showers
• swimming pool

People should understand our housing crisis is not exclusively the result of poor lending practices. It was the combination of poor lending, pushed appraisals, non-diligent underwriters/investors, and inexperienced real estate agents. I’m being extremely simplistic, to make the point the reestablishment of one sector (lending), will not remedy the real issue – that many parts of the real estate machine need a tuneup.

All attention is on the mortgage industry. We have just seen the government take-over two more financial corporations in Fannie Mae & Freddie Mac. We are constraining lending requirements as financial institutions are dropping like flies.

Does this sound like an improving market?