Metro area Median price % overvalued '10 % overvalued '06 Atlantic City, N.J. $232,100 30.2% 59% Wenatchee, Wash. $240,900 28.9% 13% Ocean City, N.J. $294,800 26.6% 47% Longview, Wash. $184,700 22.3% 24% Honolulu, Hawaii $605,300 21.9% 31% Asheville, N.C. $172,900 21.8% 24% Portland, Ore. $267,600 20.8% 35% Bellingham, Wash. $280,200 20.0% 43% Corvallis, Ore. $266,400 18.9% 14% Salem, Ore. $201,000 18.2% 25%
This is just another case of some know-it-all, self-appointed committee made up of people who must have some latent need for attention and for feelings of importance by trying to let us know how essential their opinions are to the real estate economy and our country's financial health. Back in January 2006, these same geniuses decided that Naples, Florida was the most overvalued metro area then. From the subject news article: "That finding so rankled the Naples Chamber of Commerce and area real estate agents that they hired economists to dispute the evaluation, according to Richard DeKaser, the real estate consultant who engineered the report for National City."
I skimmed this article more for amusement than anything. I put forth to you, the reader, that the powers-that-be who determined that the aforementioned markets are overvalued have no idea what they are talking about and should be completely ignored on the basis that they are just self-proclaimed captains of a ship of fools who believe their drivel. To support my assertions, let's examine what actually determines property "value" in both residential, and commercial, real estate markets.
There are three main factors that real estate appraisers use to determine "value" of any real property: 1.) cost of replacement, 2.) income generated by the property, and 3.) recent comparable sales of similar properties. Each factor has its use, depending on why this valuation is needed. For example, insurance companies typically use replacement values since, in the event of partial or complete destruction, they are charged with the responsibility of paying for part of, or all, costs to repair or replace damaged properties. In the eyes of an income investor who wants a good return on his/her invested money, the income generated by a property will probably be most appropriate. For an owner-occupant who wishes to reside in a house, recent comparable sales are usually the most relevant for valuation of the property. Early in my real estate investing career, I only considered price when I tried to place a value on a property and completely forgot to account for the time factor, which happens to be just as important as price when determining property value. Now, when I try to place a value on a property, I ask myself two things: At what price will the property sell? and How long will take to sell at that price?
Despite what appraisers, real estate agents, or other self-proclaimed experts may say, property value is determined by only one thing: how much someone is willing, and able, to pay for that property. For example, if you buy a dog house at Lowe's or Home Depot, you can get a perfectly good one for about $63 plus tax. But if there is a neighborhood where I know this same kind of dog house will sell quickly for $20,000 and someone in that neighborhood offers to sell me his/hers for $10,000, you can bet that I'll gladly borrow $10,000 from a hard money lender, or some other loan shark, and buy that sucker to flip for a quick profit...and I sure wouldn't need some property valuation committee to let me know if those dog houses are overvalued or not. The key to flipping dog houses in that neighborhood is that I must know at what price I can quickly resell those dog houses, I can't just roll dice or rely on someone else to tell me this rather crucial piece of information.
Short of being able to read minds, residential house values for owner-occupants are often best determined by recent comparable sales of similar houses in the area. While I'm not a big fan of real estate author, John T. Reed, because he is very narrow-minded in his views of creative real estate and not open to out-of-the-box thinking, I do have some of his materials and his fundamental knowledge of finances, however unimaginative, seems to be solid at the most basic levels. In at least one of his publications, Reed states that there is no such thing as a seller's market since it is ultimately the buyers who determine what they will pay to buy a property, if they even decide to buy it at all. I agree with Reed on this one. As real estate entrepreneurs, it is up to us to determine what our markets will bear. In other words, we don't dictate the markets, we merely serve them. It took me several expensive lessons by purchasing the wrong properties at too-high prices to finally pound this simple concept into my thick skull.
I've lost count of how many times I've heard a Realtor tell me, "But you should pay full asking price for this house! It's worth much more than that!", to which I smile at the Realtor and silently write him/her off as an idiot who is only concerned about getting paid a commission rather than serving the public as their local Realtor Boards claim that they have the high ethical obligation to do so just because they are "Realtors" and not only real estate agents. Now, when I look to purchase a property for resale, I try to determine a price and property type that will give me the largest pool of buyers to whom I can resell it. I call this "looking for the straw in the haystack, not the needle."
For the previously-mentioned "experts" to proclaim that certain markets are overvalued or undervalued is complete arrogance on their part. If people in those markets are willing and able to pay those prices, then those are the fair market values of those properties, pure and simple. They aren't overpriced or underpriced, they are priced just right for those particular buyers. How hard is that?
Commercial real estate tends to be a bit more objective than residential real estate since income, improving a property to its highest and best use, and recent comparable sales all become co-mingled into a cloud that seems to spit out a single fair market value for that property. Add to the mix that there is the very real possibility that there could be a mass default of commercial mortgage loans soon, and we have commercial real estate that is headed for bargain-basement prices for those astute enough to figure out how to maximize their values once they buy them up. In chaos, there is profit. As the great investor, Warren Buffett, said, "...be fearful when others are greedy and greedy when others are fearful."
Each person has a price in mind, and ability, to pay for a certain piece of real estate. This is what determines fair market value, not a group of patronizing expert wannabes. The bottom line is to do your best to know what your markets will bear and keep your finger on the pulse of those markets as they change. I can only believe that these valuation "experts" spout their opinions just to feel important, and newswriters publish this sensationalized garbage just to sell copy. After all, nobody would buy a news article that tells us that everything is fine and dandy. Controversy is what sells, not normalcy. Don't believe the media hype. Use your common sense, and get the proper training and tools to do your jobs as real estate professionals and entrepreneurs.
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