Newz: ADU Price per Sq.ft.? Time Adjustments Insanity
February 14, 2025
What’s in This Newsletter (In Order, Scroll Down)
- LIA AD: Divorce – no interior access allowed
- Should accessory dwellings be valued at the same price per square foot? By Ryan Lundquist
- $4 Million Midcentury Modern ‘Casita’ Complete With a Wacky Circular Kitchen in Rancho Mirage, CA
- Time Insanity, Part 7 of a 12 part series: GSE Guidelines Time Adjustments
- The irony of replacing appraisers with technology By Tony Pistilli
- Home Values To Plunge in ‘Climate Abandonment’ Zones Total loss of property value projected to reach $1.47 trillion
- Mortgage applications increased 2.3 percent from one week earlier
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Should accessory dwellings be valued at the same price per square foot?
By Ryan Lundquist, February 4, 2025
Excerpts: Should accessory dwelling units be valued at the same price per square foot as the main house? This question came up recently, and many people believe the price per sq ft of the house should simply extend to the ADU. This post isn’t targeted at any one person, but I have a different perspective that I’d like to share.
Comps
When we look at comps with an ADU, do we see a value that resembles anywhere close to what the ADU equation above suggests? In other words, if the house was worth $800,000 and we added a 750 sq ft ADU, would that really add $200,000 in value? Or would a 400 sq ft ADU on a $450,000 house really add $163,640 in value?
What do the comps say? That’s the question we ask about solar panels, a kitchen remodel, a new driveway, or a house with an ADU. I find looking to the comps can sound like a very frustrating solution, but the focus is really simple. What are buyers willing to pay? That’s always the question.
Closing thoughts
I realize there are situations where the appraised value of an ADU legitimately comes in too low, and there is no excusing that. So, just as I recommend caution in using an arbitrary math formula, appraisers need to be careful to not just pick a number that doesn’t make any sense when we think about data and the income being produced by the ADU.
All I’m saying is the ideal is to scour comps, do our best to discover value, and support the value in whatever credible way we can. And my concern is if listings are priced without consideration of comps or data, it could result in properties not selling and/or appraisal issues in the future. Know what I’m saying?
To read more, including over 40 comments, Click Here
My comments: Read the article. Good examples, tables and graphs, but too long to put in this newsletter.
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$4 Million Midcentury Modern ‘Casita’ Complete With a Wacky Circular Kitchen in Rancho Mirage, CA
Excerpts: 4 bedrooms, 5.5 baths, 5,422 sq.ft., 0.5 Acre lot, Built in 1988
Built in 1998, the eye-popping residence surrounded by panoramic mountain views is owned by real estate developer and philanthropists Jerry Fogelson and Bea Keats.
The home boasts four spacious bedrooms, each with its own en-suite bathroom, ensuring the utmost in privacy and convenience. The resort-like pool area is a private retreat, designed for both relaxation and entertaining.
It includes a fully equipped outdoor kitchen, perfect for alfresco dining and gatherings under the stars. The property also features owned solar panels, enhancing its energy efficiency and sustainability. A charming casita offers additional space for guests or a private office
To read the listing with 61 photos, Click Here
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Time Insanity, Part 7 of a 12 part series: GSE Guidelines Time Adjustments
By George Dell, MAI, SRA, ASA, CRE
Fun insanity — time adjustment requirements made simple. A concise market conditions guide and summary.
Excerpts for this article: Let’s outline the new GSE requirements:
- Time “adjustments” will be a required field, even if exactly zero! (Zero is a number.)
- Time-series analysis is an established method in economic measurement.
- The appraisal challenge is the varying relevant data sizes.
- The path to solution is simple and repeatable.
- Judgments required by the analyst are:
- What time-span is appropriate?
- Is there a change in the market trend?
- Are there any outlier sales to handle?
- How do I calculate dollar/time adjustment?
The established, accepted method in financial and economic analysis is called “time-series.” It’s different from other adjustments. It’s about the market segment , not location, not preferences! Not insanity.
Time is measured in days, to the contract day of the comparable sale.
Dollars is the time-indexed price, the same as other adjustments.
This series of blog posts intends to consider each of the claimed “methods,” in the context of USPAP, GSE guidelines, licensing curriculum, and FHFA/regulatory realities. We will end where we start: What is the method which brings the best accuracy, relevance, and understandability to market conditions adjustments, in the context of good science, critical thinking, and ethical intent.
In this blog series on time-series, we intend to consider the different methods suggested by the GSEs (FannieMae and FreddieMac), the FHFA (Working Paper 24-07), The Appraisal Institute, and others (including some “word salad” prose), regurgitated from the use of artificial intelligence by those who do not have human intelligence nor education in economic/statistical time series analysis.
To read this blog post, Click Here
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To see the list of the blog posts in this series, GSE Guidelines, Click Here
NOTE: The first two articles are based on the old guidelines (that nobody paid attention to).
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Mortgage Interest Rates from 1900 to 2024 and Forecast for 2025
In the February, 2025 issue of Appraisal Today
The highest and lowest rates
The lowest weekly average mortgage rate for the conventional 30-year,
fixed-rate mortgage was recorded at 2.65% in January of 2021.
The all-time high of 18.63% occured in March of 1981. I purchased my
duplex in December 1986 and got a “low” rate of 15%. The price was $120,000. Today it would be over $1,000,000 and I would not want to pay the significantly higher monthly payment.
Relationship between bonds and mortgage rates – both are long term
investments – similar.
When bond yields rise, mortgage rates usually increase as well. When
yields fall, mortgage rates generally drop. The reason for this correlation is that both bonds and mortgages are long-term investments, and investors compare them when deciding where to allocate money.
Fed interest rates vs. mortgage rates: Fed rates are overnight – very different
The federal funds rate is the interest rate at which banks lend money to one
another overnight, meaning it’s an interest rate on very short-term lending. Interest rates on other short-term bonds and loans move very closely with changes in the federal funds rate.
The 30-year mortgage, on the other hand, is a long-duration loan and thus
has a different rate at which market participants are willing to lend. This rate is determined in the bond market.
End of 1800s: Balloon mortgages become common
Waves of immigrants landed on America’s shores in the late 1800s, causing
a substantial increase in demand for property. In turn, there was an uptick in the demand for mortgages, but those mortgages were quite different from what they are today.
Five- and six-year amortization periods were the norm and borrowers
typically had to put up half of the home’s purchase price upfront, as banks would generally finance just 50% of the property’s cost. Rather than requiring borrowers to make monthly payments on the principal they borrowed, banks only required borrowers to pay interest on the loan for the five-year period. Once the loan term came to an end, borrowers were required to make a balloon payment for the full amount owed on the property.
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The irony of replacing appraisers with technology
By Tony Pistilli
Excerpts: I know we are in the height of basketball season and baseball and summer seem far away. However, as the days are getting longer, the time for spring training and the start of another season of baseball is just around the corner.
I’m certain we’ve all seen broadcasts where technology shows the pitch was clearly a ball, yet the umpire calls it a strike. There are even statistical services that “rate” the accuracy of baseball umpires on calling balls and strikes versus new technology.
The ethical dilemma
The narrative of both major league baseball umpires and real estate appraisers highlights the injustice of replacing skilled professionals with technology, even if the technology might perform the task more accurately. It’s not that umpires or appraisers are incapable of doing their jobs; rather, it’s that their jobs require subjective human interpretation that cannot today be easily replicated by a machine.
The irony of replacing appraisers with technology
Just like baseball umpires, real estate appraisers face increasing pressure from technology. AVMs, powered by artificial intelligence, can process data much faster than humans, and they can eliminate the biases that may creep into human judgment, particularly in cases where the appraiser’s background, experience, or even subconscious biases may influence their valuation. In theory, this should result in a more consistent and accurate system of property valuation.
To read more, Click Here
My comments: Worth reading. I had never thought about technology and baseball, but it works well for appraisers and technology.
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Home Values To Plunge in ‘Climate Abandonment’ Zones
Total loss of property value projected to reach $1.47 trillion
Feb. 10, 2025
Excerpts: As the property risks associated with extreme weather and climate disasters continue to rise, certain areas are projected to suffer steep losses in home values, while others benefit from their resilient locations.
These “climate abandonment” zones, which are expected to experience rising home insurance premiums and declining populations, will see an average property value decline of 6.2% through 2055, according to projections from analytics firm First Street.
California’s Fresno County is expected to take the biggest hit, with projected home value losses of 10.4% over the next 30 years, according to the report. First Street projects Fresno County’s population will decline 46% over that period, while insurance premiums rise 56%.
Other top climate abandonment zones by projected population loss include Ocean County, NJ (-33%); Monmouth County, NJ (-32%); Sacramento County, CA (-28%); and Jefferson County, AL (-26%).
“These are areas that are significantly impacted by climate risk and have a statistical relationship between that climate risk and negative population change. So we’re actually seeing population loss in these areas,” says Jeremy Porter, head of climate implications research for First Street.
To read more of this article, Click Here
To read the full First Street report, 12th National Risk Assessment: Property Prices in Peril estimates $1.4 trillion reduction in unadjusted real estate value due to climate-related risks Click Here
The full report is worth reading. Sections include: Executive Summary, Top 10 Key Takeaways, Webinar, and The Macroeconomic Impact on Your Business
My comments: What does this mean for appraisals? The listing above, in the Environmental risk section, had an Extreme Heat Factor – 7 days above 114 degrees and a Moderate Air Factor – risk of poor air quality is increasing.
To get a free risk assessment on any property from First Street, go to www.firststreet.org Enter the address in the upper left. For my property, the air pollution was Severe from proximity to freeway and various commercial properties.
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HOW TO USE THE NUMBERS BELOW. Appraisals are ordered after the loan application. These numbers tell you the future for the next few weeks. For more information on how they are compiled, Click Here.
Note: I publish a graph of this data every month in my paid monthly newsletter, Appraisal Today. For more information or get a FREE sample go to www.appraisaltoday.com/order
Or call 510-865-8041, MTW, 7 AM to noon, Pacific time.
My comments: Rates are going up and down. We are all waiting for rates to drop in 2025.
Mortgage applications increased 2.3 percent from one week earlier
WASHINGTON, D.C. (February 12, 2025) — Mortgage applications increased 2.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending February 7, 2025.
The Market Composite Index, a measure of mortgage loan application volume, increased 2.3 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 6 percent compared with the previous week. The Refinance Index increased 10 percent from the previous week and was 33 percent higher than the same week one year ago. The seasonally adjusted Purchase Index decreased 2 percent from one week earlier. The unadjusted Purchase Index increased 4 percent compared with the previous week and was 2 percent higher than the same week one year ago.
“Mortgage rates moved slightly lower last week, which led to the pace of refinance applications reaching its strongest week since October 2024,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The average loan size for refinance borrowers increased, as these borrowers tend to be more responsive for a given change in rates. Purchase applications were down from the previous week’s level but were slightly ahead of last year’s pace. The average loan size for a purchase application increased to its highest level since March 2022 at $456,100, partially driven by fewer FHA purchase applications but more VA loans compared to the previous week.”
The refinance share of mortgage activity increased to 40.2 percent of total applications from 39.0 percent the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 6.0 percent of total applications.
The FHA share of total applications decreased to 16.0 percent from 16.2 percent the week prior. The VA share of total applications increased to 14.6 percent from 13.3 percent the week prior. The USDA share of total applications remained unchanged at 0.5 percent from the week prior.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) decreased to 6.95 percent from 6.97 percent, with points remained unchanged at 0.64 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The effective rate decreased from last week.
The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $766,550) decreased to 6.96 percent from 7.01 percent, with points decreasing to 0.39 from 0.48 (including the origination fee) for 80 percent LTV loans. The effective rate decreased from last week.
The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA remained unchanged at 6.69 percent, with points decreasing to 0.80 from 0.84 (including the origination fee) for 80 percent LTV loans. The effective rate decreased from last week.
The average contract interest rate for 15-year fixed-rate mortgages decreased to 6.35 percent from 6.36 percent, with points decreasing to 0.63 from 0.69 (including the origination fee) for 80 percent LTV loans. The effective rate decreased from last week.
The average contract interest rate for 5/1 ARMs increased to 6.20 percent from 6.07 percent, with points increasing to 0.65 from 0.64 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week.
The survey covers U.S. closed-end residential mortgage applications originated through retail and consumer direct channels. The survey has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks, thrifts, and credit unions. Base period and value for all indexes is March 16, 1990=100.
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Ann O’Rourke, MAI, SRA, MBA
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