That issue of what a reasonable cap rate is always does rear its head, doesn’t it?  I’d like to learn more about what’s reasonable and how to determine it.

We’ve hit a point in Sacramento where many areas are witnessing sharp upswings in year-on-year unit sales.  Unit  sales in 95828 and 95829, for example, have increased 172%!  That area saw the kind of price decline that you quote for Stockton.  Other areas are seeing unit volume increase more modestly, but on the whole I think we’re at the price where demand will continue to stay strong.

Thanks for the post. Care to take a stab at defending the sales comparison approach vs. moving to income capitalization as I suggested?

I certainly don’t see that the income approach is done as an addendum today. And while median income may be a better measure of prudence, it is too broad a brush given individual property differences. Comparable rents can better reflect differences like size, ameneties and location which should certainly still play a role in valuation. While hopefully still eliminating run ups in sales comps due to speculation or the financial engineering of payment to increase price.

Sean

Terrific post up until the sales comparison comment. I know exactly what you’re saying though, but what lenders need to do is revamp the whole way they think about appraisal. Instead of being a single point in time incident, it should be a continuous and on-going valuation dialogue. Think of it this way, if they “mark to market” securities, they should treat the assets collateralizing pools similarly versus relying on automation or other 3rd party analysis that was not a party to the origination of the debt. Appraisals, industry wide, tied to securities, should have a present and “future value” component to be recertified a period later, say 1 year. In doing so, they can appropriate provisions adequately against losses necessary to adjust rates or upfront premiums with the market, not in perpetuity of the market.

As to relying on a cap rates in a residential assignment, it would be done in addendum to the sale comparison method anyway. But what is more important, in my judgment, is median income analysis. A bank simply can not lend 80/20 finance on $850,000 in a $60,000 a year median area. Lenders were not absent the resource to be prudent, hence Paul Volkers’ recent comment that the system failed the test of the market. Securitization is great as long as incentives to originate/distribute quality, not quantity, are aligned throughout the money chain.

Michael

That won’t stop hot markets from becoming speculative – but it will require cash to push prices beyond the fundamentals, rather than allowing buyers to speculate with the banks money that us taxpayers inevitably end up paying for.

I certainly think that setting sales prices and making offers will revolve around the comparable sales approach – just restrained by lender limitations of reasonability.

James Frangella

Radar revolutionized the business, and made our hunting a million times easier…keep up the great work!

Thanks for FINALLY doing a blog so I can stop emailing you “What’s going to happen next?” every other day!

http://www.farbelowmarket.com