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November 17, 2017September 19, 2018

Marijuana’s high home values

Did you know that the licensing of medical marijuana dispensaries in Maryland has begun? There are only a handful of licensed dispensaries at this time, including one in Montgomery County. Besides dispensaries, Maryland’s budding medical marijuana industry includes growers and processors. Even though the industry is just taking off, there is growing support for legalizing marijuana for recreational use. This is evidenced by recent bills introduced in the Maryland General Assembly that focused on establishing a tax for cannabis sales. Besides increasing tax revenue for states where marijuana is decriminalized, there also seems to be a phenomenon of high home values.

If Maryland does decriminalize marijuana, it could be a potential source of tax. The San Francisco Chronicle (6 lessons from legal pot in Washington and Colorado; sfchronicle.com; September 30, 2016) pointed out that the state of Washington has had a windfall since legalizing pot. It was reported that Washington collected $135 million for the fiscal year 2015 and $186 million for the fiscal year 2016. They were expected a fifty percent for the fiscal year 2017. And that is just on the excise tax on pot products, and doesn’t include the collected sales tax.

About those high home values…

Colorado and Washington state have realized a significant housing boom since decriminalizing marijuana. Washington DC’s housing market has been buzzing along quite nicely as well. While the surrounding suburbs’ housing market has slowed, GCAAR’s October stats (gcarr.com) reveal that Washington DC’s home sales have surged about ten percent year-to-date and average home sale prices grew about four percent! Recent empirical studies have validated the housing-marijuana relationship.

One recent paper that provides such evidence was presented at the 2017 Annual Meeting of the Allied Social Sciences Associations held by the American Economic Association. Cheng, Mayer and Mayer (The Effect of Legalizing Retail Marijuana on Housing Values: Evidence from Colorado; working paper, 2016) measured the “benefits and costs” of legalizing marijuana expressed in home prices. They concede that although marijuana legalization is controversial, there are some benefits. They determined that there is a causal effect such that Colorado’s retail marijuana law implementation was instrumental in its recent housing boom. They concluded that implementing a retail marijuana law will give home prices a bump of about six percent. They also found that high home values and inventory are mutually exclusive, such that the increase in housing demand did not affect housing supply.

Are high home values worth the affects of decriminalizing pot? High home values is not everything.

Regardless of high home values, decriminalizing marijuana is not all peaches and cream. Not to be a buzzkill, marijuana can also negatively impact real estate too. Amy Hoak’s reporting lists a number of issues where legalizing marijuana has adverse effects to housing (5 ways marijuana legalization affects real estate; MarketWatch.com; November 25, 2014).

A major issue Hoak points out concerns federal law. Regardless of any state or local retail marijuana law, the Feds still consider marijuana verboten. Properties (commercial or residential) that are associated with marijuana related activities and can be subjected to civil asset forfeiture. Another issue is financing properties related to the marijuana industry. Federally chartered banks conform to federal law and won’t lend on these properties.

Hoak also points out issues with properties where marijuana is processed, sold or used (commercial or residential). There has been a significant increase in property explosions in states where marijuana has been decriminalized. The explosions are likely due to processing marijuana into hash oil, a process that involves butane. Mold is an issue where marijuana is grown, because of the large amounts of water used in the process. Much like cigarette smoke, marijuana odors can permeate walls and be very difficult to remove. Even if a lease forbids it, residential landlords can have problems when tenants grow, process, and smoke marijuana in the home.

Regardless of the increased home value phenomenon associated with retail marijuana laws, some homes can be difficult to sell. High home values aside, homes that have been “tainted” with odors or mold can languish on the market, even if they are in prime locations. Finally, Hoak pointed out that people are not keen living next to properties involved in the marijuana industry.

Original published at https://dankrell.com/blog/2017/11/17/marijuanas-high-home-values/

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

March 23, 2017December 13, 2022

Violent crime effects home values

Last week’s alleged horrific and violent crime has propelled our Montgomery County MD community, specifically Rockville, into the national spotlight. And like other communities that have experienced violent crimes, residents will be asking questions long after the spotlight dims. Unfortunately, the aftermath of violent crimes not only leaves a psychological scar on the community, it also affects home values.

Of course, it’s intuitive to think that home values are affected by violent crime. You might ask, how can such a violent act that occurred last week not be in the minds of prospective home buyers? And as you will see in the research below, violent crime will also compel some home owners to move.

A 2009 study by John Hipp, George Tita and Robert Greenbaum sought to determine the interrelationship between crime and “residential mobility” (Drive-Bys and Trade-Ups: Examining the Directionality of the Crime and Residential Instability Relationship; Social Forces; 2009, Vol. 87, No. 4, pp.1777-1812). The findings revealed that although there is no evidence that a year with a high number of home sales increases violent crimes, they found direct evidence that a year with a high number of violent crimes will increase home sales during the ensuing year. The same holds true for property crimes, where a high number of home sales do not lead to increased property crimes, however a high number of property crimes will increase the number of home sales the following year. They also found evidence of a downward trend in home values following a year of high violent crime. The authors of the study concluded that households basically respond to crime by moving. Additionally, many home buyers not only take crime stats into account, but likely consider recent high profile crimes when deciding on a home.

They also found evidence of a downward trend in home values following a year of high violent crime.

There are decades of research on the effects of violent crime on property values. For example, an influential article by Sheila Little published in 1988 discussed an appraiser’s duty to consider violent crime when determining property value (Effects of Violent Crimes on Residential Property Values; Appraisal Journal; 1988, Vol. 56,No. 3, p341-343). She stated; “It is part of appraisers’ responsibilities to make an effort to ascertain the effects of violent crimes on market value of properties.”

Fortunately, communities heal. However, it’s not easy and certainly not immediate; as evidenced by the research of George Galster, Jackie Cutsingerm and Up Lim. They studied how five US cities responded to “exogenous shock,” such as violent crime (Are Neighbourhoods Self-stabilising? Exploring Endogenous Dynamics; Urban Studies; 2007, Vol 44, No.1, pp. 167-185). They concluded that communities have a “self-regulating adjustment” mechanism that help them adjust and stabilize after various external shocks. Although an increase in violent and property crime will elicit a community’s self-regulation mechanism; stabilization takes “considerably longer” than other external shocks, especially when the shock to the community is substantial.

Galster, Cutsingerm, and Lim rhetorically ask how the self-correcting mechanism functions; how does it adjust and stabilize a community? They propose that there are social, economic, and/or political reactions to shocks such as violent crime. They surmise these reactions are manifested as a “powerful momentum” within communities.

Our community’s self-regulating mechanism has already been deployed, as demonstrated by the intense parent and community involvement in Rockville, asking questions and seeking change. And you can expect a “powerful momentum,” as described above, for change. The resulting social, economic, and/or political change will limit the effects of such violent crimes on home values, and demonstrates why Montgomery County MD continues to be the residence of choice for many home buyers.

By Dan Krell
Copyright © 2017

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January 6, 2017November 23, 2021

Greedy home seller tips

Don't be a greedy home seller — Pricing Strategy for a Home Sale (infographic from forsalebyowner.com)

When there is a buzz about home sellers being greedy, you know home sales are doing well. So, not surprisingly, along with last year’s record home sales came the reports of greedy home sellers. Are you a greedy home seller? Or are you adjusting to a market where home prices are increasing?

Greed has developed a bad rap. Surely there is an evolutionary basis for greed. Many believe that early hominids promoted personal and group survival by being “greedy” (although disputed by some). Those who hoarded food, so as to have more than enough, lived through difficult winters and droughts. During times of financial prosperity, greed is looked upon favorably. However, in the aftermath of a recession, greed is thought of as the basis for fiscal calamity. Immortalized in Gordon Geckko’s famous “greed is good” speech in the 1987 movie Wall Street, “greed” is a cinematic vehicle to show the fine line between a healthy desire to prosper and a corrupt drive to have more than enough.

Avoid being viewed as a greedy home seller by creating a realistic pricing strategy. Creating a pricing strategy is an art and a science. When selling a home, you have to determine the list price. There are many factors to consider besides recent neighborhood sales, such as condition of your home, sales trends, mortgage interest rates, economic trends, etc. Like other home sellers, you fall into a conundrum. If you price your home too high, then it will limit potential home buyers who visit. However, if you price your home too low to increase home buyer interest, you may not get the price you want.

Contrary to some assertions that a home’s list price doesn’t play a role in the sale, there is evidence to suggest that it really does matter. Lu Han and William C. Strange determined that a lower list price does increase home buyer visits – but only to a point (What is the Role of the Asking Price for a House? University of Toronto, Rotman School of Management; 2012). They concluded that there is a point at which the home price is perceived to attract too much buyer competition, which may turn off other home buyers. Furthermore, their data shows that there is a negative relationship between a list price and the number of home buyers: meaning that the higher the list price relative to the neighborhood, the lower number of home buyer visits, and vice-versa.

If you fear being a greedy home seller by asking for a high price for your home, there is research to suggest that you’ll let go of the greed in order to make a deal. A 2013 study by Nuno T. Magessi and Luis Antunes looked at how the emotions of fear and greed compete internally (Agent’s fear monitors the spread of greed in a social network; Proceedings of the 11th European Workshop on Multi‐Agent Systems EUMAS, 12-13). They concluded that greed is mitigated by the fear of loss within the confines of a social network. When applied to a home sale, the fear of not selling a home competes with the impulse to hold out for the high price. Deducing further, there is a need to fit within one’s social network by trying to sell a home for the most money, and yet avoid the stigma of a failed home sale.

Don’t be a greedy home seller. RealtorMag described three common home seller mistakes in a 2015 post (3 Mistakes Sellers Often Make; realtormag.realtor.org; April 12, 2015). Included were “Not being honest with the home’s history,” “Not making a better home presentation,” and “Being unrealistic about the home’s value.” About unrealistic home value, it was said:

“…Despite tight inventories of homes for-sale in many markets, sellers still need to be careful not to get too greedy with their list price, say real estate professionals…Home owners tend to get a much lower price when they overprice a home at the onset and then drop the price several times. The longer the home lingers on a market, the more likely it will receive a deeper discount…”

If your home doesn’t sell, you must examine your pricing strategy. Was the price realistic, or were you too greedy?

Original published at https://dankrell.com/blog/2017/01/06/greedy-home-seller/

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December 29, 2016July 13, 2019

Lot premium value on new home

There is an ongoing debate about the lot premium. Essentially, is there a value of paying a “premium” for a home site when buying a new home? Certainly, the home builder is seeking to increase their profit margin. But for a home buyer, there is a question of future value at resale.

A home builder will typically sell certain home sites within a community at a higher price, effectively increasing the price of a new home. Some home sites are deemed to be more “valuable” because of the lot’s characteristics and/or location. A lot premium may be charged if a home site is larger, flatter, and/or more symmetrical than others in the community. Lots tucked away from the main road or close to common areas are typically premium priced as well.

Don’t hate the home builder for charging a lot premium on your new home. Home builders are trying to sustain a business by recouping the cost and financial risk of land development. Placing a premium on home sites has become a science, and research consultants typically provide data on developing home sites and pricing.

However, there is also an economic factor. When the housing market was still reeling from the Great Recession, charging a lot premium was not common. However, home builders added lot premiums when sales recovered.

John Burns, CEO of John Burns Consulting, wrote about the rising premiums on home sites as the new home market recovered in 2013 (Lot Premiums Are Back!; realestateconsulting.com; May 23,2013), stating “Our consulting team has noted a significant trend in the market: lot premiums are rising substantially!” Burns broke down lot premiums based on region. And, of course, lot premiums increased according to how the region’s housing market recovered. For example, lot premiums in Florida were about 10 percent at that time; While Southern California was trending to include the premium in the list price to help stabilize prices. Also, the DC region’s housing market was still recovering and home builders were only charging 1 to 2 percent for a lot premium.

Burns also noted that buyer demographics can also dictate lot premiums. At that time, it was reported that home builders in Southern California were charging a 5 percent premium based on feng shui and home site orientation. And a 20 percent premium was charged for home sites with “good feng shui” that were located on a cul-de-sac.

The availability of buildable home sites may also dictate lot premium charges in the near future. A recent National Association of Home Builders survey indicated a shortage of home building lots (Lot Shortages Worse Than Ever According to NAHB Survey; nahb.org; May 26, 2016). NAHB Chief Economist Robert Dietz stated, “We have monitored lot availability for the last two decades, and it is clear that the scarcity of building lots is growing… Whether due to land use policy, geographic constraints or other regulatory constraints, the lack of lots for residential construction will have negative impacts on housing affordability in many markets.”

To understand the relative numbers, NAHB stated “…this record shortage comes at a time when new homes are being started at a rate of under 1.2 million a year. In 2005, when total housing starts were over 2 million, the share of builders reporting a shortage of lots was 53 percent…”

If you pay a lot premium on a new home, however, it is not always clear that you would be able to pass on the premium when you re-sell. But a recent study conducted by Paul K. Asabere and Forrest E. Huffman (The Relative Impacts of Trails and Greenbelts on Home Price; Journal of Real Estate Finance and Economics; May 2009; vol 38, p408) provides some data on what you might expect: home sites close to trails, greenbelts, and greenways can demand a price premium of up to 5 percent. A similar effect can also be found in homes with a “view” or in a cul-de-sac; as well as homes that are adjacent to a golf course, playground, tennis court, neighborhood pool.

Original published at https://dankrell.com/blog/2016/12/29/lot-premium-value-on-new-home/

By Dan Krell
Copyright © 2016

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June 3, 2016November 23, 2021

Housing bubble countdown

The March S&P/Case-Shiller U.S. National Home Price Index (spindices.com) was announced May 31^st to reveal a 5.2% increase in home prices. Although down from last March’s 5.3% increase, home prices seem to be appreciating at a regular pace, with the metro areas of Portland, Seattle, and Denver leading the way with double digit gains (year-over-year price increases of 12.3%, 10.8%, 10.0% respectively). As home prices climb, so too are the claims that we are experiencing a housing bubble.

Those concerned about the next bubble have been ringing the alarm bells since last fall, when the combination of limited inventory, multiple offers, and rising prices created an environment in some regions that was reminiscent of the go-go market just prior to the last market bust. And like the broken watch that is correct twice a day, those naysayers may eventually be correct – but it may not be for another eight years.

How to predict a housing bubble

According to Ted Nicolais, the real estate cycle has been steady since 1800 (How to Use Real Estate Trends to Predict the Next Housing Bubble; dce.harvard.edu; February 20, 2014). Writing for the Harvard University’s Department of Continuing Education’s The Language of Business blog, Nicolais maps out Homer Hoyt’s cycles and found a regular 18-year cycle to the bubble and bust housing market (albeit two exceptions).

The 18-year cycle, as it turns out can be observed by analyzing trends. An applying Henry George’s four phases of the real estate cycle (as modernized by Glenn R. Mueller), Nicolais can determine how and when the next housing bubble will occur. (Henry George was a nineteenth century economist who studied the boom-bust cycle of the economy).

The first phase is the “recovery.” Home prices are at the bottom, and demand increases. Real estate vacancies decrease as economic activity increases, which fuels the economy.

The second phase is the “expansion.” Housing inventories dwindle, there is little is available to buy, and finding a rental becomes difficult. Nicolais explains that an issue with real estate is that once demand increases, filling inventory takes a long time. New development can take two to five years. Until new inventory is added, price growth accelerates; and rather than valued at market conditions, real estate becomes priced to future gains. During a real estate boom, people buy into the prospect of “future growth” and believe the escalating prices are reasonable.

Phase three is “hyper supply.” When the completion of new development begins to satisfy demand, inventories fist stabilizes and then swells. Price growth begins to slow. Nicolais stated that the amount of continued development will determine the severity of the impending recession; while demand is satiated, new inventory comes to market and vacancies increase. He asserted that “wise” developers stop building during this phase.

Phase four is the “recession.” New development is stopped, while projects coming to completion add to a growing inventory. Occupancy rates and prices fall; property values and profits dwindle. Developments in mid-construction may not be completed because they are no longer financially feasible.

Following the four phases and the 18-year cycle; Nicolais stated that the great recession was not caused by external forces, but rather occurred on schedule! He figures that the current housing market is transitioning from recovery to an expansion phase. And with the exception of the occasional slow down, he predicts that the next housing bubble will be in 2024.

Original published at https://dankrell.com/blog/2016/06/03/housing-bubble-countdown/

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