Matrix Blog

Amenities, Adjustments & Value Logic

Zillow is Forecasting Future Property Values

May 14, 2014 | 10:42 am |

zillow-logo

“I may be cool, but you can’t change the future” –Beavis & Butthead.

Zillow has recently re-announced it is forecasting the value of each property out over the next year. It’s not a new tool for them, at least conceptually since the “What is a Zestimate Forecast?” page was last updated on October 3, 2012.

In a world with Big Data, it’s clearly inevitable to see an expansion of the capabilities of services from firms like Zillow and Trulia as their data set grows. Zillow’s Zestimate was a key web site feature at their launch (no listings!), but the company lit the real estate housing market industry on fire, establishing Zillow as a powerful brand that was here to stay, even if the Zestimate tool was problematic.

The challenges facing the Zillow Forecast tool

The Zestimates are still dependent on the quality of public record
Many markets (ie NYC), have quality-challenged public record. But as time passes, Zillow’s data set gets bigger and their logarithms get better and I have not doubt that the reliability will continue to improve.

If the Zestimate is wrong, the forecast will be wrong
Take a look at this chart on the highest price closed sale in Manhattan:

15cpwzestimatechart

This is perhaps Manhattan’s most famous “trophy” sale of the past several years, 15 Central Park West. The property sold for $88M but the Zestimate at the time of sale indicated the value was $72M. However today the value is $11.9M and the forecast estimated an 8.6% increase next year to $12.9M.

15cpwlandingpage

The Zestimate Forecast projects the current Zestimate out over the next year using a bunch of indicators

Zillow uses:
-mortgage interest rate (local, but not much different than national)
-property tax rate(local)
-construction costs(local)
-number of vacant homes(assumed local)
-percentage of loans that are subprime(assumed local)
-percentage of delinquent loans (assumed local)
-supply of homes for sale (local)
-change in household income (somewhat local, huge lag time)
-population growth (somewhat local, huge lag time)
-unemployment rate (somewhat local, lag time)

I feel that most of these indicators, when considered as a group, are important to consider won’t capture the nuance of next year’s view because they either lag or aren’t granular enough to be a key influence on value trends over a short period. I would think Zillow would add search patterns and other “Internety” things to leverage their proprietary data to help with accuracy. I’d also consider “new inventory”, not just total inventory (supply) to help catch the nuances of a tight time frame of forecasting.

The key national factor driving nearly all housing markets now – credit – is really hard to quantify.

Still, forecasts are the future (sorry) and kudos to Zillow for taking the first step, even though the results, like the early days of the Zestimate, are probably not very accurate.

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Combinations: Creating a Larger Manhattan Co-op or Condo

April 20, 2014 | 5:58 pm |

1q14MATRIXcombos

[click to expand]

Over my career, I’ve have observed a higher frequency of combination apartments (ie co-ops or condos) when inventory is tight.  A combination apartment is simply the connecting of 2 or more adjacent apartments (to either side, above or below).  It may be easier and/or less expensive to buy the apartment next door to create a larger space (even if you have to overpay for it) than to brave the tough market searching for a larger place to live.

A few years ago I started to track this during the preparation of the Elliman Report: Manhattan Sales. I looked at the actual apartment numbers and counted those that suggested they were combined. I am clearly omitting apartment nomenclature that is not so clear ie 7AB is renamed 7A, so my results are conservative.  The above chart reflects the recent trend of more combinations being sold but doesn’t necessarily equate to more being created, so new combinations would only be considered a subset of this data.

I’ve dubbed the phenomenon “1 + 1 = 2.5” because there is a premium for larger contiguous space.

I’ve always thought co-op or condo building that allow combinations (nearly all do) as providing a potential way for shareholders to realize value upside, thereby enhancing the price structure of a building ie higher values rub off on other apartments in the same building.

Some top line ideas about combinations

  • No shares are lost and in fact, many combinations  result in the acquisition of dormant common hallway space providing additional revenue in perpetuity to the corporation and a cash infusion from the purchase price.
  • Larger units sell for more on a ppsf basis (ie my formula above) potentially influencing higher values for other units.
  • A few less apartments in the mix is a non-issue (ie risk) in a building this size, unlike, say a 4 unit brownstone.
  • I’ve always thought it wise to keep the stock certificates separate to give the buyers and co-op more flexibility, but I see this done both ways (and admittedly don’t understand any legal nuances on this point.)

Some other more granular thoughts

Some layouts don’t work
– Not all combo layouts make sense or provide value upside.
– Layouts tend to work better in pre-war and new developments than post-wars.
– 1980s condos often often the least combinable layouts – ie a side by side 1 bedrooms.
– Over the last decade, developers have kept this in mind during construction to give them more flexibility during the sales process.

Higher value per square foot
– Creating larger apartments creates value upside to existing space ie “1+1=2.5”
– Sometimes large combos can be oversized for the building and there is no ppsf premium for the larger space.
– When a an owner of a large unit buyers the adjacent unit, the mere fact that the same unit owner owns both usually results in a ppsf premium before renovations are made to connect.
– The upside in value for a smaller apartment, means that a buyer can overpay for the unit as an individual sale but the addition of the smaller unit to the large unit adds value to both units on a ppsf.
– The highest value is realized when the buyer can’t tell the layout was comprised of two different units.  Simply creating a door between two apartments would realize the least upside.

That second kitchen
– The biggest “tell” on a combo is the existence of a second kitchen.
– They are often converted to a laundry room or bathroom, taking advantage of the utility connections.
– Buildings might object to the removal of the second kitchen because it may impact the building Certificate of Occupancy – I defer to lawyers on this point.

What do lenders think?
– Some banks are scared of combinations and others are not.
– In my experience banks require financing on the whole apartment – if they have a loan using collateral of one of the apartments, they will require that it be replaced with a new mortgage to cover both apartments.
– Banks often get confused on the value of a combo asking the appraiser to provide a value for each of the separate apartments before they are combined. The problem with that position is that the combination is usually worth more as one apartment (even before considering improvements) – in other words, the sum of the parts is less than the whole and the bank will incorrectly assume the collateral is inadequate.

Maintenance fees
– Many agents tell me it is assumed that maintenance charges are skewed higher for combos. I can’t prove this, all other things being equal.  When it occurs, it’s probably for reasons other than simply combining the units.
– A combo in a small building, ie a 4-unit brownstone co-op, raises the risk to the remaining shareholders if the combo shareholder stops paying their maintenance charges. Risk exposure to a mid to large sized building should be nominal.

Common Area
– Quite often hallways are purchased and incorporated into a combo layout for a better result.
– The co-op wins by getting a cash infusion for the purchase and income in perpetuity for the additional share allocation from the common area purchase.

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Repost: Measuring Manhattan Values By Floor Level

March 25, 2014 | 1:36 pm | | Favorites |

In the spring of 2012 my floor level valuation methodology was illustrated in a great piece in New York Magazine by Jhoanna Robledo called “What Price Height and Light?. The graphic and accompanying descriptions provide incredible clarity to a fairly convoluted subject.

In the flurry of transitioning content to our new site over the past few months, I remember the actual moment when I deleted the original post for this topic by mistake and thought, “wow this is annoying but I can always go the Wayback Machine.” However, today someone asked me about the graphic and I couldn’t find my prior post on the Wayback Machine (but I found a bunch of cool stuff) so I am reposting this piece. I really LOVE the graphic that New York Magazine came up with.

The graphic is fairly self-explanatory.

nymag4-2012301w57

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[Three Cents Worth NY #232] The Manhattan GRM Is Too Damn High

May 29, 2013 | 10:19 am | | Charts |

It’s time to share my Three Cents Worth (3CW) on Curbed NY, at the intersection of neighborhood and real estate in the capital of the world…and I’m here to take measurements.

Check out this week’s 3CW column on @CurbedNY:

Not a very original title, but after realizing the long weekend was unfairly ending after only three days, I took a look at the relationship between sales prices and rental prices through the “gross rent multiplier” aka GRM. I presented the relationship between median sales price and annualized median rental price since 1991 as a ratio…

[click to expand chart]

 


Today’s Post: Three Cents Worth: The Manhattan GRM Is Too Damn High [Curbed]
Three Cents Worth Archive Curbed NY
Three Cents Worth Archive Curbed DC
Three Cents Worth Archive Curbed Miami

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Should We Adjust Housing For Inflation?

February 4, 2013 | 1:27 pm | | Charts |


[click to expand]

I’ve inflation-adjusted housing in some of my charts over the years but it always felt like a double dip since housing is a huge component (42%) of the measurement of inflation.

The issue came up again with last week’s excellent WSJ article on our Manhattan housing figures – adjusted for inflation, housing prices were equivalent to 2004 levels and not adjusting for inflation brought prices to 2006-2007 levels. So I reached out to my friend Jed Kolko, the Chief Economist and Head of Analytics at Trulia who had some thoughts about the issue.

[Jonathan] Is it appropriate to inflation adjust housing prices? I don’t see this done all that often and always wondered if it was appropriate since housing prices (i.e. rental equivalent) are a huge part of the inflation calc?

[Jed] You’re right, that housing prices are an important part of inflation, so it’s a little odd to deflate housing prices by a measure that includes housing prices.

[Jonathan] So when would it be appropriate?

[Jed] The context when it does make sense to inflation-adjust housing prices is when looking over a very long time horizon – like decades – when dollars clearly meant something different than today. In particular, analyses of home prices versus price changes of other assets (like equities) are often (and should be) inflation adjusted in order to show the real return on investment.

[Jonathan] So when would it not be appropriate?

[Jed] The context when it’s definitely not appropriate is when comparing home prices across different cities/metros/regions. Measures of local inflation are hugely driven by home prices, and even local differences in the prices of other things, like restaurant meals or haircuts, are driven largely by local differences in real estate costs. Inflation-adjusting when comparing local home prices is a case of dividing something by itself. The better way to compare housing prices across metros relative to spending power is to divide home prices by income or wages. I did exactly that in this post, as a measure of affordability.

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Valuing A Fireplace

February 3, 2013 | 10:00 am | |

A few weeks ago I provided some logic to Jhoanna Robledo at New York Magazine about valuing a fireplace. She’s just as interested in quantifying amenities as I am and has written some fun pieces on valuing various amenities using my logic. Floor level. Outdoor space. Light and Views.

She distilled down the ±90 minutes of discussion on the hot topic…and remember when it comes to valuation logic, one size doesn’t fit all. My approach came from 26 years of valuing thousands of co-ops, condos and townhouses in NYC but the same logic could very well apply to other markets.

In a study of Manhattan sales that appraiser Jonathan Miller made with researchers from NYU’s Furman Center for Real Estate and Urban Policy, apartments with fireplaces cost an average of about 10 percent more than those without. (The difference was 11.4 percent in condos, 9.7 in co-ops.) But the fireplace is “part of a suite of amenities” not easily parsed from other prewar features like high ceilings. Miller estimates that the fireplace itself adds 2 to 5 percent to the price. That’s a fairly wide range, depending majorly on placement: A mantel in the center of the living room is worth a lot more than if it’s in a back bedroom. And if the fireplace doesn’t work, or the flue needs more than a cosmetic touch-up? That cuts the value by half.

Think yule log.

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Reverse Polish Notation Refresher: HP12C Video For Real Estate

January 9, 2013 | 10:14 am |

Bruce Kirsch over at REFM Blog posts a view worthy class on the stalwart of real estate calculators, the HP 12C.

Here’s my sentimental look at retiring my old HP12C.

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[Case Shiller] Recovery Is Back In Season

December 27, 2012 | 7:00 am | Charts |


[click to expand chart]

Well the frequently maligned but most influential housing metric was published yesterday, the S&P/Case Shiller Home Price Indices and the 20 City index rose 4.3% year-over-year. The only two “regions” to see declines were Chicago and New York.

Baseball Correlation? Chicago and New York are the only 2 cities who also have 2 Major League Baseball teams. No, Los Angeles doesn’t have two MLB teams…the Los Angeles Angels of Anaheim are clearly trying to have it both ways.

But I digress…

With all the talk about “recovery” (aka happy housing news) these days it just dawned on me that since 2000, the Case Shiller HPI only began to show significant seasonality since mid-2009. No one has really talked about this and I’m not sure what it means, but it just jumped out at me today.

Pre-peak housing prices fueled by falling lending standards and the seasons were largely crushed by the locomotive known as the housing boom. Therefore the seasonally adjusted and non-seasonally adjusted price trends were virtually the same during the market’s ascent. I distinctly remember real estate agents commenting during this period that the seasons were going away and housing market patterns were changing permanently.

Post-peak housing prices After the plunge subsided in mid-2009, the market began to ebb and flow with peaks in the spring/summer and troughs in the fall/winter.

Note to self
The next time CSI prices begins to smooth into nothingness, perhaps it’s a housing boom, baby.

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Valuing the Light in Your Condo or Co-op

December 3, 2012 | 11:05 am | | Favorites |

Jhoanna Robledo over at New York Magazine squeezes light from my proverbial turnip and the result is a very cool graphic on one way to value light in an apartment in her piece “What’s the Price of Light?” The topic of view have been recently explored and floor level.

Light is perhaps the most subjective of the view-floor level-light trio but this is the logic our firm has used for years (based on the “paired sales” theory that isn’t very practical in an appraiser’s daily life) but I feel it’s a good starting point, and of course it depends on the nuances of each situation.

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Central Park Views Before and After One57

December 3, 2012 | 9:00 am | |

A lot is being made about the value of views these days.

The law of supply and demand is also in force. “If you look at the number of buildings that have a view of Central Park and you look at the shoreline of Manhattan,” Mr. Miller said, “the waterfront is a lot bigger. There’s a much more exclusive nature to having a park view.”

You can be on a very high floor and still lose a significant part of your view amenity as the following photos indicate. Views are nearly always discussed in the context of what is gained rather than what is lost. In NYC, no view is ever guaranteed. These were taken by one of my appraisers from the same spot from a high floor on a building across the street looking directly north over Central Park before and after One57 topped out.

Before

After

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Knight Frank Tall Towers Report Shows London With Similar Manhattan Height Premium

November 6, 2012 | 10:00 am | | Reports |

Knight Frank released their new report exploring the floor level premium in London’s high-rise residential developments with the coolest report name ever: Knight Frank Tall Towers Report 2012

While NYC has a taller residential housing stock than London but the premium per floor is similar. London shows a 1.5% increase in value per floor. My rule of thumb for Manhattan has been 1% to 1.5%, but closer to 1%. However we treat floor level as a different amenity than view and that’s probably the reason for the slightly larger adjustment in London. What’s particularly of interest is how much more the per floor cost of development is for higher floors:

Net to gross area ratios in tower schemes are lower, since the percentage of space taken up by the cores and service provision areas are comparatively high. This means that the effective revenue-generating 43% Uplift in construction costs per sq ft between the 10th and 50th floor.

I’ve explored the subject myself in New York Magazine and The Real Deal Magazine.



Tall Towers Report 2012 [Knight Frank]
Manhattan Values By Floor Level [Matrix/New York Magazine]
The cost of a view [The Real Deal]

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9 Feet Under: Some Thoughts About Valuing Basements and Cellars

June 22, 2012 | 2:16 pm | |

I’m not sure what’s in the water these days but I am receiving a growing number of emails and calls about the valuation of basement space from real estate agents so I thought I collect my thoughts and cobble together a post to point people to.

First, a few definitions for the sake of clarity and in order of depth:

At Grade Ground level
English Basement Brownstones in New York City (and perhaps elsewhere) where the first floor is partially below grade on the street side of the building and opens at grade in the rear.
Basement The area underneath a building that is partly or fully below grade.
Cellar Usually the lowest part of a building. Located below an English Basement
Sub-Cellar Rare but when exists it becomes the lowest part of a building. Located below a cellar.

The valuation of below grade space, whether its a co-op, condo or house uses the same principals we use when appraising outdoor space. I see it as an amenity “add on” because not all properties have them.

When appraising, we attempt to establish the value of the above grade space on a per square foot basis. The below grade space, ie a basement or cellar, can be viewed as a portion or percentage of the value of the above grade space – “cents on the dollar”. In other words, the value of basement area is proportional to the value of the residence that sits above it. It’s worth more in a home that is of high value than a home with a lower relative value.

“Technically” Below Grade, The “English Basement”
Many of the old brownstone floorplans in NYC public record refer to the first level as the “basement” and the floor below it as the “cellar.” That is because many brownstones were constructed with a stoop from the street to the “parlor” (2nd) floor which was the entertaining space with the highest ceiling height and most decorative detail. The first floor is usually a few steps down from the sidewalk yet it opens at grade to the rear and contains the kitchen and has the same finishes and ceiling height as the upper floors of the building. Market participants see English Basements as equivalent to the above grade space and therefore it should be included in the square footage. Here’s a recent Q & A:

Question is it legal to count basement space as part of the sq. footage when selling a town home? This particular house has a 9-ft ceilinged finished basement but no windows. My buyer wants to know for resale purposes.

Answer For suburban homes, a traditional basement is below grade and would not be included in overall square footage even if it is finished and has rooms. In NYC brownstones, the same rule applies EXCEPT a basement could be included if it is a few steps below grade in the front and opens at grade in the rear (aka “English Basement”) AND the space has the same finishes, ceiling height as the floor above and includes a key room like a kitchen. If the space isn’t considered the equivalent to living area on the floor above it is NOT included in total sq ft but adjusted for separately. In the case of a brownstone with an “English Basement”, the space below is referred to as a “cellar” and is never included in the sq ft.

Condos and Co-ops With Basements
Many ground floor loft and non-loft apartments and tenement walk-ups have direct access to the building basement. I can’t tell you how many wrought iron circular stairways I walked (aka squeezed) down while appraising ground floor co-op walk-ups with below grade space during the 1980s co-op conversion boom. It was a great way for developers/sponsors to maximize the value of underutilized space, calling them “recreation rooms” even thought they are used as bedrooms. Here’s a recent Q & A:

Question I’m the sellers broker for a ground floor duplex loft space. We are currently in contract and we marketed the space as a one bed because the lower level is used as just that. The lower level is beneath ground without windows. The appraiser tells me that the C of O for the space calls for the lower level as a recreation space not a bedroom. Should this have a significant impact on the value of the apartment. Can’t is be viewed as loft space, period. Thank you for any insights you may have.

Answer Technically, the below grade area shouldn’t be called a “bedroom” and the sqft should not be included in the total sqft in an appraisal. However it contributes value and is handled as a separate line adjustment in the appraisal. The value of the space is usually something less than the ppsf of the ground floor if there was no basement. That applies to room count as well. The logic follows that if this space was a 1st and 2nd floor duplex instead of ground floor + basement, it would be worth more, everything else being equal. I’m not sure about “significant impact” but it makes it worth less than a fully above grade similar sized space. If the selling price is consistent with that relationship of competing properties, then there should be no problem with purchase price. The appraiser problem is really what you are referring to. Unfortunately, there is nothing you can do at this point since they have already inspected the property and are impossible to contact. Hopefully it will work out.

How Appraisers (Should) Handle It
As a rule, ie Fannie Mae guidelines (page 564), appraisers can’t include below grade space in the total square footage of a building (or the room count). In other words, the location, quality and configuration of the space is viewed by consumers as something less than above grade space in the same property.

Here’s Fannie Mae’s take (May 2012):

Basement Sleeze During Boom
During the housing boom when banks and mortgage brokers (well, really everyone) lost their minds, it was quite common for unethical appraisers, working in conjunction with mortgage brokers or lenders, to include basement space in the square footage because the space opened to grade in the rear of the house and was finished. A 2-story house that was 2,000 square feet when purchased, suddenly was 3,000 square feet when subsequently refinanced.

The Math (Market Derived)
Here a some possible ways (there are always exceptions and outliers) to approach the valuation of below grade space (in order of literal depth):

English Basement No adjustment – I’ve never observed an impact on a brownstone’s “English Basement” square footage – it is simply part of the gross building area of the brownstone.
Basement 50%-75% of the above grade ppsf – In our NYC experience, below grade space, whether it is within a brownstone, co-op or condo, their basement areas are often worth 50% to 75% of the above grade space on a per square foot basis. In a typical suburban detached house, the value is often worth less than that.
Cellar 50%-75% of the above grade ppsf – A NYC cellar (located below an “English Basement”) is handled same way an actual (i.e. suburban) basement is, something like 50% to 75% of the above grade space because it is basically the same thing.
Sub-Cellar 20%-35% of the above grade ppsf – A sub-cellar (usually located below the cellar located below an “English Basement”) is usually valued at 20% to 30% of the above grade space but this obviously depends on what the market data shows.

That’s all the dirt I can think of. Hope this helps clarify things.


[Terra Logic] Understanding The Value of Manhattan Apartment Outdoor Space [Matrix]
Fannie Mae Selling Gude “Appraisal Guidelines” [eFannieMae]

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