Paul's Appraisal Blog

What makes a house recession-proof
January 10th, 2008 5:58 AM

(This was taken from

What makes a house recession-proof

Good homes sell even in a bad market -- and here are a dozen principles the experts watch for when evaluating a potential sale.

The real-estate bust has stripped all the smoke and mirrors from the housing market. In the starkest way possible, it is revealing which homes hold value in a recession, and why.

"Even in this market, there are certain things that will sell," says real-estate agent Michelle Sandoval in Port Townsend, Wash., where it's difficult to sell homes, although prices haven't dropped.

"Even in this market, I've had things sell for over full price. There are always bulletproof properties" that hold value better, Sandoval adds.

Certain upgrades can help recession-proof your house, but your home's price resilience mostly depends on choices you made when you purchased. Since most homeowners buy and sell several times in their lives, you're likely to have a chance to use these bulletproof principles the next time you buy.

Location, location, location

You've heard it before because it's true: Location matters. It matters most, in fact, when it comes to holding value under pressure. Why? Because houses are replaceable, but land is not. If you've got a spot everyone wants, your place will sell faster and for a better price than a similar house elsewhere.

Take Punta Gorda, Fla., where, at this very moment, house prices are sliding so fast you can almost hear them sink.

"Everything is depreciating," says Cady Rowe, an agent with Coldwell Banker Morris Realty in Punta Gorda. However, Rowe adds, how deeply your price depreciates depends on where "your dirt" is.

"If your dirt is sitting in Punta Gorda Isles on the waterfront, it's going to be worth a lot more than dirt somewhere else with a thousand lots just like it," Rowe points out.

A December study by Moody's predicted price declines in Punta Gorda will be the worst in the nation -- down 35.3% by the second quarter of 2009. And that's not accounting for inflation.

That makes Punta Gorda a laboratory for testing the effect of location on the durability of prices. Appraiser Charles M. Polk III agreed to do some informal research for MSN Money. Polk, an appraiser with 20 years' experience and advanced credentials in valuing residential and commercial property, is also an attorney, a real-estate agent and a magistrate who adjudicates county tax appeals.

In December, Polk compared the sales of 59 homes of equal size and quality in Punta Gorda Isles and the nearby inland development of Deep Creek. Location makes all the difference, he found. Although all Punta Gorda real estate lost value, Punta Gorda Isles homes didn't lose as much. Based on square-foot prices, Punta Gorda Isles homes had seen a 22% drop in sales prices since the last half of 2006, compared with a 32% drop in Deep Creek prices.

More than a view

Location means more than just views and water frontage. Other elements include:

Neighborhood. In some cities -- San Francisco is one -- the durability of home values varies from block to block, says San Franciscan Dick Lepre, whose blog, The Economy, covers real estate.

Lepre, a broker with Residential Pacific Mortgage, says of his town: "It's very much neighborhood-dependent. If you take my house and move it a few blocks up the hill, it's worth another $300,000. And, if you move it down the hill three blocks, it could be worth $300,000 less. In that sense, (affluent) Pacific Heights or my neighborhood, called Market Duboce, tend to be recession-proof because people always want to live there."

With housing prices falling and mortgage money scarce, foreclosures are going through the roof. Homeowner Merian Terry thought she'd escape that by taking an offer to help that turned out to be too good to be true.

Schools and safety. These make or break values. In some Bay Area communities, overseas investors buy homes sight unseen based on the value of the city's public-school rankings. Questions about schools and safety are the first out of buyers' mouths, says Furhad Waquad, an agent in suburban Detroit. He refers them to local police departments for neighborhood information and to the free Standard & Poor's school evaluation service, SchoolMatters.

Culture and public services. Buyers favor homes near libraries, parks, playgrounds and revitalized or charming commercial areas with shopping and coffee shops and theaters. An easy walk to light-rail terminals and bus lines is a plus. In communities full of retirees, proximity to hospitals and doctors' offices is valued.

One caution: Watch out for noise. It's good to be close to an elementary school but not next door, and it's good to be near a main street with bus service but not directly on it.

Infrastructure. Although the fringes of hot cities are popular locations when prices are rising, interest falls off quickly in a downturn. City sewer and water service help hold up prices compared with an identical home on a septic system and well water. Cities with fatter tax bases may boast quicker fire department response times, better-maintained streets and stronger schools, all of which sustain demand.

Take the simple matter of sidewalks: Waquad points to the wealthy communities of Bloomfield Township and Bloomfield Hills, originally built without sidewalks. He credits their recent decisions to install sidewalks for helping hold up sale prices in the Detroit area's severe down market. "Now, you see mothers and nannies with prams and strollers, people exercising, running. It has made a world of difference," Waquad says.


Principles of durability

Location is just one piece, albeit a big one, of recession-proofing. When buying, these principles matter, too:

The "progression" principle. This rule of thumb says better homes bring up the value of a not-so-great house nearby. (And lesser homes subtract from nearby property values.) The lesson: Don't buy the best house on the block.

George Baker, an expert in residential and commercial appraisals with Vestor Realty Consultants in Wilmette, Ill., knew this when he purchased his 2,400-square-foot home surrounded by 5,000-square-foot palaces. "Its value is enhanced by the fact that it's on the block with better, larger properties," says Baker, who is also a real-estate broker.

Single-family homes rule. Condominiums lose more value in a down market, and they lose it faster than single-family homes, says Terry Bernhardt, a Portland, Ore., home appraiser. In part that's because builders tend to throw up too many condos when a market is hot. Also, it's because more buyers want single-family homes than condos. In Portland, Bernhardt says, "middle market" houses hold value best because even in a downturn, more people want them.

Some trends endure. In Bernhardt's market, the craze is Craftsman bungalows. He thinks it's a durable trend. Craftsman homes have charming, slightly nostalgic designs that include covered porches, a mix of indoor and outdoor living areas, higher ceilings and lots of architectural details, including moldings trim, stair rails, and built-in nooks and bookcases.

"It's a warm, attractive design that everybody seems to like, and it prices up substantially," Bernhardt says. Don't bank on a trend, however, without doing plenty of research into what sells in your particular market.

Low carrying costs seal a deal. Buyers may face a shock when confronted by the real cost of a home, in addition to the taxes and mortgage payments. The carrying cost of a house -- including homeowners insurance, utilities, upgrades, deferred maintenance and, in some markets, landscaping and snow removal -- can make a deal unattractive.

Homes that have these costs under control retain value when buyers compare them with homes that have higher yearly carrying costs, says Baker, the Wilmette appraiser.

Market peculiarities matter. As with politics, all real estate is local, so learn your particular market inside out. (Before you buy, get an education as you interview prospective sales agents. Ask each one what's selling and why.)

Apply this knowledge by keeping the home's next owner in mind when you buy or build, says Sandoval, the owner of Windermere Port Townsend. In her small city -- a somewhat remote waterfront community attractive to retirees -- single-level, low-maintenance houses are weathering the market slump best. The town's many beautiful Victorian homes no longer fetch premium prices because these empty nesters shun the upkeep responsibilities.

Market peculiarities even vary by neighborhood. Take suburban New Jersey, where large communities of observant Jews obey the biblical proscription to avoid work on the Sabbath. That includes walking, not driving, to religious services. Thus locations near conservative and orthodox synagogues hold value extremely well in places such as the Highland Park and Edison municipalities near New Brunswick, says Justin Footerman, a broker-associate with Prudential Fox & Roach Realtors in North Brunswick.

Remodel to support value

When you're thinking of investing in upgrades, you can build in more enduring value by following these rules of thumb:

Broad appeal. In a shrinking universe of buyers, homes with the broadest appeal hold their value best. The homes most in demand are three-bedroom, two-car-garage houses with at least two bathrooms. Keep this in mind when you're thinking of remodeling. When comparing the wisdom of adding a new, high-end kitchen, for example, versus a bedroom addition to your two-bedroom home, the addition is probably your best bet for durable value.

That's why, when Port Townsend agent Sandoval and her husband built their home, she vetoed his idea of putting the kitchen and living areas on the third floor, with the best views. Such "reverse floor plans" appeal to too few people, she says. He also wanted to forgo installing a dishwasher. He made a good point: They didn't use one. But "if you built a house uniquely for yourself, with no dishwasher, four levels and concrete floors throughout, there are going to be fewer people likely to like that house," Sandoval says.

With housing prices falling and mortgage money scarce, foreclosures are going through the roof. Homeowner Merian Terry thought she'd escape that by taking an offer to help that turned out to be too good to be true.

Attractive bathrooms and kitchen. These rooms, with all their costly plumbing, wiring and cabinets, have the highest value per square foot of any in the house. Investing in their upkeep props up a home's price, says Portland appraiser Bernhardt. Extravagance isn't helpful. Buyers are simply looking for well-appointed, updated rooms with good layouts and appliances.

"Purchase decisions on residences are typically made by the woman of the house," Bernhardt says, "and they are going to go with where they have to spend the majority of their time."

Upgrades for energy efficiency. Improvements to a home's energy efficiency promise a lower cost of upkeep, so buyers pay attention. Good investments include highly efficient windows, beefed-up insulation, new siding and appliances.

On the other hand, highly personal investments such as lavish kitchen remodels, swimming pools, game rooms and media centers may even detract from a home's price, at least in Portland, Bernhardt says. That's because few buyers may share your tastes. A new owner may see your swimming pool as a liability or a nuisance that must be torn out at great expense.

Published Jan. 9, 2008

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Posted by Paul McEwen on January 10th, 2008 5:58 AMPost a Comment

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