Fannie Mae Requires Appraisers to Use a Measurement Model for Square Footage Not Used by Realtors

How we measure the gross living area of a home is important, but there is little consistency. Different websites may use different numbers for the same home, primarily because they tend to have only one field for square footage.

Below, I’ll write about Fannie Mae’s new rules for measuring homes, but it’s up to each real estate website operator which number it uses for square footage. For example, the web page that we create for each Golden Real Estate listing has only one square footage field, so I choose to display finished square footage. The MLS has fields to distinguish between finished, unfinished, basement, above-grade, and total square feet, as shown below, and all those fields are uploaded to every consumer website, but I haven’t found any consumer website which displays all those fields.

Zillow is an example of a website which features only the total square footage in each listing, even if half that area is unfinished basement space. It doesn’t show the breakdown of finished vs. unfinished space or basement vs. above-grade space unless you click on a link titled “See more facts and features.”

Trulia, which is owned by Zillow, has a link “See all” which lists “finished area” if you scroll down far enough, but that’s all. I find this ironic, because both Trulia and Zillow provide a ton of information not found on the MLS, yet they downplay or omit the most important detail of all — the breakdown of square footage.

Redfin, which, like Trulia and Zillow, gets the full feed from our MLS, also features only the total square feet and has no link that I could find which displays a breakdown. And, like both Trulia and Zillow, Redfin prominently features “price per square foot,” but that figure is based on the total square feet, which can be really misleading.

Golden Real Estate’s website, like those three, gets its active listings from the MLS, but our display is managed by the MLS, and all listings on our website use the finished square footage number, which is, I believe, the most useful single number to use. But, once again, there’s only one field for displaying square footage.

The MLS has its own consumer-facing website, www.REcolorado.com, where you can search for listings. On that site, the total square footage is featured, but scroll down and you see this very thorough breakdown of square footage:

On other websites, you’d only see 3,166 square feet and $271/sq. ft. for the listing in this example.

The numbers  displayed on the MLS are entered by the listing agent. Our sole obligation in providing them is to indicate the source. It could be from public records, or it could be from a prior appraisal. We could also measure it ourselves, but that is really unlikely. The only requirement is that we disclose the source. The safest choice is public records, but those numbers could be wrong.

Fun fact: Square footage of a home, by whatever standard, is measured from the outside of the exterior walls, not the inside.

Lenders, of course, want to know that the square footage is accurate and consistent, so recently Fannie Mae mandated that all appraisers follow the ANSI (American National Standards Institute) standard, which can result in appraisals which come up with different numbers than in the MLS listing on which the buyer relied.

The ANSI standards don’t allow for space with ceiling heights under 7’ to be included in the gross living area, and the square footage of staircases can only be counted on the level from which the staircase descends. Also, if even part of a level is below grade, the entire level has to be counted as “basement,” which directly conflicts with MLS rules which say the lower level of a bi-level or tri-level home (which is at least partially below grade) can be counted as above-grade square footage.

Complicating matters, appraisers must measure properties using the ANSI standards, but they have no choice but to rely on MLS measurements for the comps they cite in an appraisal, which were surely not done to ANSI standards. The technical term for this is “apples and oranges…”

There are three different square footage numbers for every MLS listing, and here is a quick tutorial on REcolorado’s rules for measuring square footage.

Above-Grade square footage used to be called “Main” square footage. As the new name suggests, it does not include basement square footage.  But that begs the question, “what is a basement?”  In a split-level home, the lower level, which is often below grade, is included in the “above-grade” square footage, since there is frequently a basement below that level. In a “raised ranch” home, the lower level is included in “above-grade” square footage for the same reason. (A “raised ranch” is defined as a home where you have to climb a flight of stairs to get to the “main” level. The “main” level is defined as the level containing the kitchen.) 

Finished square footage includes all the finished square feet, whether in the basement or above-grade. If the basement is unfinished (or there is no basement), this number will be the same as the “Above Grade” number.

Total square footage is what the name suggests, whether finished or unfinished.

All three of these numbers will be different when a listing has a partially finished basement.

DMAR’s Metro Area Statistics Cover 11 Counties

What do the rural cities and towns of Kiowa, Agate, Simla, Fairplay, Georgetown, Empire, Black Hawk, Rollinsville, Nederland, Allenspark, Lyons, Longmont, and Bennett have in common?  They’re all included in the Denver metro area statistics compiled monthly by the Denver Metro Association of Realtors for its market trends report. Here is a map of the 11 counties included in that report.

REcolorado, the Denver MLS, allows infinite flexibility in drawing the boundaries when searching for listings or doing statistical analysis, so my preference is always to draw a radius of 20 miles from downtown Denver when compiling metro statistics.

Below is this month’s infographic from DMAR showing the November month-over-month statistics for their 11-county “metro area.”

Under all five elements of the infographic I have inserted the same November statistics for the 20-mile radius of downtown Denver that I prefer to use.

The variations this month are not as great as I have seen in some months.

NAR’s Annual Survey of Buyers and Sellers Shows Big Deviations From Past Years

 Every year the National Association of Realtors (NAR) surveys buyers and sellers of primary residences on a variety of topics. Usually, the changes from one year to the next are fairly minor, but the most recent survey (covering the period from July 2021 through June 2022) produced some big statistical deviations from prior years. Here are some of the findings that stood out to me.

1)   The percentage of first-time buyers dropped to a record low of just 27%, beating the previous record low of 30% in 1987 — 35 years ago! In the 2020-2021 survey it was 34%. The average age of first-time buyers jumped from 33 to 36. The average age of repeat buyers also rose — from 56 to 59.

2)   88% of all buyers were White, the highest percentage since the 1990s. Meanwhile, the percentage of buyers who were Black and Asian/Pacific Islander both dropped by half, from 6% to 3%. The percentage of buyers who were Hispanic/Latino rose slightly from 7% to 8%.

3)  Buyers moved an average of 50 miles from where they lived before, up from 15 miles the prior year, which was as high as it had been since at least the 1980s. (See chart below.) So, where did they move? Suburbs took a big hit, plunging from 51% to 39%, while rural and small town destinations jumped by half — 12% to 19% for rural areas and 20% to 29% for small towns. The NAR survey attributes that change to the pandemic’s effect of encouraging work from home. “Zoom towns were boom towns.”

4)   While only 3% of first-time buyers paid cash for their homes, 27% of repeat buyers paid cash, up from 17% the prior year. The survey attributes this to the surge in equity which homeowners had experienced in recent years, especially during the pandemic, providing them with lots of cash to spend on their replacement homes.

5)  How long buyers expect to remain in the home they just purchased had held steady since 2009 at 15 years for repeat buyers and 10 years for first-time buyers. The NAR survey showed a huge jump in that expectation for first-time homebuyers — from 10 years to 18 years. The expectation of repeat buyers remained unchanged at 15 years.

6)   The percentage of first-time buyers who had been renters plunged from 73% to 64%, while the number who moved from living with family or friends jumped from 21% to 27%. (See chart below.)

Click here to view the full summary of NAR’s 2022 survey of buyers and sellers.

Here’s How Denver’s Real Estate Market Has Performed Since the Start of the Pandemic and the Recent Surge in Interest Rates

The charts below will not surprise any of us who have been witnessing the Denver real estate market over the past 2½ years. They do, however, document the death rattle of the seller’s market, which was killed by the Federal Reserve’s Open Market Committee, whose dramatic increases in the Federal Funds Rate were reflected in the amazingly quick increases in mortgage interest rates.

NOTE: The MLS charts above were created on REcolorado.com, limiting data to listings within an 18-mile radius of downtown Denver. That covers the entire Denver Metro area roughly within the C470/E470 beltway, but does not reach to the City of Boulder.

Back in January, when the 30-year fixed mortgage rate was just above 3%, it was hard to imagine that before year’s end the rate would be over 7%. The rates started rising in January, but they didn’t break above 4% until about the time that the FOMC started its aggressive rate increases.

(As a layman, I’ve never quite understood how inflating the cost of money is the best strategy for reducing inflation of everything else. And haven’t we noticed that that strategy hasn’t really worked yet? Some food for thought….)

Looking now at the three MLS charts, you can see that the number of sold listings exceeded the number of active listings throughout most the pandemic but sharply diverged starting around the time the FOMC rate increases began in mid-April.

The number of new listings saw no dramatic changes over previous years, but the number of listings that expired without selling was 3.24 times as high in October as it was in April of this year. Many of those new listings have sat on the MLS, as shown in the median days in MLS, which quadrupled from 4 to 16 days from April to October.

What may surprise observers is that the median sold price fell as little as it did from April to October. It is still higher than it was in January of this year when that 30-year fixed interest rate was about 3%.

What lies ahead? Homes are still selling, and buyers still need to buy, leading me to believe that we’ll see a “normal” market soon. Stay tuned!

How Does This October’s Real Estate Market Compare to Last October’s Market?

We all know that the Denver metro real estate market has changed dramatically this year, so I thought it would be interesting to compare the first 16 days of October with the same 16 days of October 2021. Here’s what I found.

I pulled the real estate sold listings on REcolorado, Denver’s MLS, for both years, limited to the area within 18 miles of downtown Denver, which roughly includes the area within the C-470/E-470 beltway, but does not include the city of Boulder.

Yes, the market has slowed, but the median sold price jumped from $450,000 for the first 16 days of October 2021 to $550,000 for the same period this year — a 22.2% increase. However, the number of closings plummeted from 2,411 during that period in 2021 to 1,650 this year, a 31.6% decline.

The ratio of sold price to original listing price dropped from 100.82% last year to 99.94% this year, and the median days before going under contract increased from 5 days last October to 16 days this year.

What effect did this year’s increase in interest rates have? During October 1-16, 2021, 18.1% of the closings were cash. During the same period this year, cash closings rose only to 18.25% — hardly any impact, it seems.

Anecdotally, I have observed that higher priced homes are selling more readily in this slower market, so I checked to see what percent of closings were $1 million or higher. During October 1-16, 2021, 6.51% of closings were over $1 million, but that rose significantly this October to 9.94% — and those million-dollar-plus homes sold quicker, with a median days before going under contract of 12, compared to 17 days for homes under $1 million.

There are many more unsold (that is, active) listings now than there were last October — 5,996 compared to 4,386 last year — and fewer pending listings — 3,310 compared to 4,913 last October. A consistent characteristic of the seller’s market was that there were more homes under contract at any given time than there were for sale, which was frustrating for buyers who would see “for sale” signs in front of homes, more than half of which were not, in fact, available to purchase because they were under contract.

Price reductions continue to be quite common in today’s real estate market. Of those nearly 6,000 listings currently active within that 18-mile radius of downtown Denver, over 1,000 per week are reducing their listing prices. As a result, we’re seeing a surge of low-ball offers for listings in all price ranges, as buyers know that homes are not selling for their asking prices and might go for far less.

Just this week, I know of one listing that was on the market for 100 days, starting at $685,000 (a price that was justified by prior sales of comparable homes), reducing its listing price over time to $589,000. The seller finally threw in the towel and sold it to a quick-closing cash investor for under $500,000. That’s an extreme example, but it’s says a lot about the market we are in now.

That example also provides another lesson about the market, because it was an unrenovated home. It had an unimproved kitchen and unimproved bathrooms and nothing flashy or exciting to catch buyers’ attention. My observation has been that homes which are unimproved or otherwise “plain” are sitting on the market and selling only after serious price reductions, whereas homes that are newer or beautifully updated are selling quickly and even attracting a bidding war.

The reason is simple, as I see it: Buyers are simply not inspired to “pull the trigger” at this time, especially if they need to borrow money. It takes a lot to get an offer from them.

Cash Sales Are Up Less Here Than Nationally

By JIM SMITH

Like you, I’ve read reports from Zillow, Redfin, the National Association of Realtors, and others about the surge in investor purchases and the percentage of transactions that are all cash, but I can rarely confirm those reports when I do statistical searches on REcolorado, Denver’s MLS.

For example, Inman, the leading real estate news service, reported the following last Saturday: “All-cash home purchases in the U.S. hit 31.4 percent of all transactions in July 2022, up from 27.5 percent the year before, and just shy of an eight-year high reached in February, according to data released Friday by Redfin. Since the beginning of 2021, all-cash purchases have surged thanks to a pandemic-housing rush, reaching an apex in February when 32.1 percent of all transactions were made without financing, according to Redfin.”

Compare those numbers with the chart below, created from REcolorado, based on closings within 25 miles of the State Capitol.

The pandemic took root in April 2020, but there is only a modest increase in the percentage of cash transactions well into year two of the pandemic. A more significant increase can be noted in 2022, but the peak was well before the increase in mortgage interest rates which only showed up in April, and the percentage of cash sales actually dropped a little as those rates increased.

Regardless of those fluctuations, the percentages are well below the national percentages reported by Inman.

MLS Statistics Confirm a Rapidly Slowing Real Estate Market in Metro Area

As I write this on Sunday evening, I can’t know what the statistics will be at the end of August, so I ran some numbers for the first 28 days of the month to see how they compare to the previous 12 months. The result of that number crunching is in the chart below, and it confirms what we have all been feeling — that the real estate market in the metro area is indeed slowly abruptly.

The chart, limited to REcolorado listings within an  18-mile radius of the state Capitol, shows four metrics which I consult regularly to read the temperature of the market: the average and median days that a listing is active before going under contract, the ratio of sold price to listing price, and the average sold price. As you can see on the bottom four lines of the chart, the market started coming off its peak in May, slipping seriously by July.

During the seller’s market triggered by low mortgage interest rates and the pandemic, we saw the median days on the MLS in the mid single digits, as shown in column two. The average days on the MLS was higher, but not as high as in pre-pandemic times when it was in the 30s and 40s. Amazingly, that metric slipped into the single digits this April and May.

The last time the ratio of sold price to listing price was below 100% was in January 2020. In April of this year, before the impact of rising mortgage interest rates, it peaked at 106.1%, but it fell to 100% in July for the first time in 18 months, and during the first 28 days of August, it slipped to 99.57%.

The average sold price, which fell almost $30,000 in July, fell an unprecedented $58,136 during Aug. 1-28, a 9.2% drop in just one month.  When the full month is tabulated, it could well be worse.

For buyers who have cash or are not scared away by 5% interest rates, this represents an opportunity, and I have had my busiest open houses in a long time over the past three weekends, so I think buyers are ready to capitalize on that opportunity.

This is not to say there will be a market rebound anytime soon. There is a lot of uncertainty in the air in terms of politics, economics, and other matters, which will continue to keep many buyers on the sidelines.

Statistics Help to Quantify the Slowing Real Estate Market in Metro Denver

Here are some ways I’ve been able to quantify what we are all seeing, namely the slowing of our local real estate market.

Looking within 14 miles of downtown Denver, the currently active (i.e., unsold) listings have a median days on MLS (DOM) of 27 days. However, the currently pending listings have a median DOM of 13, and the listings that closed in the last 30 days have a median days on the MLS of 7.

The listings that closed in the prior 30 days had a median DOM of just 5, which is what it has been, more or less, through the past couple years. So the market is definitely slowing, and slowing rather abruptly.

The number of active listings —  what we refer to as “inventory” — has surged as homes sit on the market longer.

As I write this on Tuesday morning, there are 4,133 active listings on REcolorado, the Denver MLS, in that same 14-mile radius. That’s down from the peak of 5,521 at the end of July, but you have to go back to September 2020 to find a higher number of active listings than this July, as shown in the chart below.

In prior years, you’d see the number of active listings increase by 50%, more or less, from January to July, but look at this year’s more than triple surge from January to July in that chart.

The chart of pending listings (below) is also instructive. Notice that in most months during 2021 and 2022, the number pending listings was almost always higher than the number of active listings (above chart), but that changed in June and July, when the numbers dropped dramatically.

You’d expect, in a normal market, with a lot more listings to choose from, that more listings would go under contract, but the reverse was true. As the number of listings surged in June and July, the number of listings going under contract went down substantially. That, too, reflects an abrupt slowing of Denver’s real estate market.

(As an aside, notice the effect of the pandemic on the April 2020 number of pending listings. April was the first full month of the pandemic, and the number of listings going under contract plummeted at a time of year when they would normally surge. Notice, however, the quick recovery in the following months. It has been surmised that Covid soon caused a surge in sales as people began to work at home and saw the need for more home office space and the opportunity to move further from their place of work since they were no longer commuting.)

Another statistic demonstrating the slowing of Denver’s real estate market is the extent to which the median sold price of homes has fallen as the market has turned.

The median sold price for that   14-mile radius peaked at $582,950 in June, but it fell to $550,000 in July and has fallen to $520,000 for closings during the first half of August — going down, but still higher than in any prior year.

NOTE: The above article was adapted for a Jefferson County audience using only Jeffco statistics. You can read a PDF of that version at www.JimSmithColumns.com.

Buyers and Sellers Are Confused by Today’s Chaotic Real Estate Market  

Frankly, we real estate agents are confused, too! Homes that would have attracted bidding wars a few months ago are sitting on the market — attracting few showings and no offers.

But it’s really a tale of two real estate markets, because there are “special” homes which still attract bidding wars. It’s the “ordinary” homes which are not getting any love — tract homes, mostly.

The trigger for this change, as we all assumed, was the abrupt increase in mortgage interest rates which occurred around April 1st, combined, no doubt, with a sinking stock market. There are investors who have already sold those stocks and are cash rich, but there are also investors who prefer to hold their depreciated portfolio and wait for the stock market to recover.

Buyers who can pay cash are unaffected by the rise in interest rates and continue to bid against fellow cash buyers for the “special” homes, especially million-dollar homes. They no doubt appreciate the reduced competition for those homes with the reduction in the number of buyers who depend on mortgage financing.

According to data obtained from REcolorado, the Denver MLS, there has been a negligible increase in the percentage of cash versus non-cash closings, but the rise in interest rates will likely be a factor ongoingly.  

The one statistically significant change I spotted was an 80% increase in closings for homes over $1 million  in the 2nd Quarter compared to the 1st Quarter of 2022. This compares to less than a 50% increase in the sales of homes priced between $500,000 and $800,000. I would normally expect the sales of those lower-priced homes to increase during the “selling season” at least as much as the homes over $1 million.

The chart above shows a sharp drop in total MLS sales this June versus the June of 2021, but there’s a longer trend at work than I didn’t suspect before creating this chart using REcolorado data. Notice that 2021 was the peak year and that 2022 showed a month-to-month decline in year-over-year sales for the first six months of the year. The drop in total sales only became significant in June, probably reflecting that change in the mortgage market.

You can also see that 2020 — the year in which Covid-19 appeared — was showing significant growth until the lockdowns occurred in March, resulting in a dramatic drop in total MLS sales, but only for the two months I highlighted in yellow. Then we saw a huge upswing in June, probably due to pent-up demand from April and May.

The question on everyone’s mind is where do we go from here?

My crystal ball is foggy right now, but I think mortgage rates have risen as much as they’re going to this year, and may even moderate in coming months, during which time buyers will come to accept rates in the 5% range as historically “okay,” which they are. We were spoiled by the 3% rates that we enjoyed in 2021, but the memory of those rates is fading. Unless the economy enters a recession, I feel that buyers will return to the market and we’ll see another surge from those buyers who have stayed on the sidelines these past couple months. Then homes which would have sold in less than a week a few months ago, will start moving again.