The Unanswered Question
Perhaps the most common question I am asked is "What's going to happen to... " be it to property values,
the local real estate market, construction trends, in general. "What’s going to happen?"
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So, I dusted off my crystal ball
and it gave me three answers!
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1) Property values will decrease
2) Property values will remain stable
3) Property values will increase
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Now I'll admit, I thought my
crystal ball was broken till I thought about it a little bit more. I now believe it to be quite accurate.
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In my first appraisal course I ever took we learned the basic appraisal principals. Of these, CHANGE is the one that
comes to mind first, with this principal directly related to INCLINING AND DECLINING PERIODS. The principal says that,
"The first phase is an inclining period or growth period. After the first period, there is a time of minimal change and
stability is obtained. This stage is followed by a declining period, during which the area loses its desirability." The
fourth stage, the renewal or gentrification stage is similar to the static stage wherein the cycle starts over again.
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It is my opinion that in 2007 we saw the static stage at the top of the cycle. In 2008 we saw the declining
stage and it is very possible that this will continue through 2009 at a rate of 2.5%. You have to understand though;
this is at best a guess. You can’t hold me to any of this because I put a catchy little disclaimer at the bottom
of the page!
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Seriously though, if we think about BASIC real estate principals I think we all can predict WHAT is going to happen.
We just don't know yet HOW exactly it's going to happen and when that inclining period will come back around. I'm
an optimist and I believe we won't see much more decline in 2009 than in 2008 with one exception. Vacant land, look
for that to come down a bit. (my guess is about, 10% but we'll compare notes on that next year) Some would argue that
if vacant land value drops, shouldn't single family home value? After all, homes are built on land.... and that's
a very good point and I would agree with the argument. But, if you consider the amount of value land contributes to property
values, usually in the 15-25% range and depreciate the land alone, 10% of 25% is 2.5% it would makes sense that property value
of single family homes would decrease approximately 2.5%. The theory is crude, but it is also supportable. In 2008, vacant
land saw a decrease of 5.76% in the Helena area. Single family homes saw a decrease of 1.43%. What’s 25% (land to building
ratio) of 5.76% (land depreciation)?
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The answer is 1.44%. The last two years of statistics for vacant land and single family homes support the theory. We are oversupplied in the amount of vacant land in the
Helena area. At last count we had 762 single family homes sites available, and that’s a lot. (get it, a lot?
haha)
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In 2008 we sold 145 parcels of vacant
land. With 762 current listings, that is over a 5 year’s supply of lots if we sell at the same rate as 2008. So that’s it, that’s my theory derived
from my crystal ball…and a little bit of factual data. Some experts may disagree with me and some experts may be right
to. But again this is my opinion based on relevant information that I have taken from the local market.