I have a few things on my mind today. Let’s talk about square footage rules changing, crazy gas prices, and recession buzz.
1) NEW SQUARE FOOTAGE STANDARDS FOR APPRAISERS:
If you didn’t know, Fannie Mae is adopting some changes with the way appraisers measure square footage (pdf). In short, as of April 1, 2022, appraisers are going to be required to measure square footage per ANSI standards (American National Standards Institute). The idea is to standardize the way things are measured to help increase uniformity in appraisal reports. In my mind, this isn’t poised to revolutionize the way appraisers report square footage, but there will be some fine-tuning. Keep in mind this does not apply to private appraisals for tax purposes, divorce, etc…
NOTE: So far we don’t know for certain if FHA and VA will adopt ANSI.
Some things to know about ANSI:
- Appraisers will now be required to round to the nearest tenth of a foot (basically, the nearest inch).
- Below-grade area doesn’t count in the square footage (but it can count in the value).
- There will be more of an emphasis on “below grade” instead of “basement.”
- At least 50% of the ceiling height needs to be seven feet or above to count in the square footage (it can still count in the value as non-square footage if it’s below seven feet).
- Area below five feet doesn’t count in the square footage (I have a blog post 10 years ago about this).
- Stairs count for square footage for the level from which they descend.
- The space below stairs also counts in the square footage. I completely get this if there is a closet with accessible space, but it seems illogical to me to count the space below if there isn’t any access. In my mind this can inflate the square footage by 30 square feet or so.
Keep in mind builders and public records may not use ANSI measuring standards, so it’s possible we can see more minor discrepancies between the square footage in appraisal reports and public records. Of course, Tax Records is not always right. Anyway, I’ll keep talking about this as needed.
2) GAS PRICES AREN’T DRIVING THE HOUSING MARKET:
Gas prices have been unreal lately, and all of us are feeling it (besides Tesla owners flexing right now). Anyway, what do gas prices mean for the housing market? Here’s an absurd graph to compare the median price in Sacramento with gas prices in the state. Honestly, this is a ridiculous visual, but I wanted to share it to say there isn’t likely a correlation between gas prices and home prices. In other words, people don’t say, “Gas prices are low, so I’m going to buy a house,” or “Oh dang, gas prices are rising, so I’m going to wait to buy a home until gas comes down.” I’m not diminishing the pain of the lofty cost of gas, but fuel prices aren’t likely the deciding factor on whether someone buys a home or not. Yet, if gas and other goods and utilities keep rising, that can start to affect buyer behavior.
By the way, I went to Death Valley a few weeks ago, and here were gas prices at the time. I would guess they’re maybe a dollar higher now because this was before the war started. Keep in mind this station is in the middle of nowhere. Here are some pics of our trip.
3) HOME PRICES DON’T ALWAYS DIP DURING A RECESSION:
I’ve heard some economists talk about a coming recession. I’m not making predictions, but I wanted to mention some thoughts about home prices. It’s easy to think real estate collapses during or after a recession, but that’s not always the case. The truth is not all recessions are created equally, so there isn’t any one rule for how the housing market will react. In short, if people start to struggle financially and uncertainty increases, that’s where we can tend to see an impact to home prices. Here’s a presentation I put together a few years ago called Deep Recession Thoughts (pdf).
RECESSION VIDEO: Here is a video of my recession presentation too.
MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.
Thanks for being here.
Questions: Have you started to drive less lately? Has your behavior been affected in any way by inflation? What do you think about ANSI square footage measurements?
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I’m always surprised how much everyone talks about gas prices when they increase. When you look at gas prices adjusted for inflation going back to the 70s, the price is quite stable. Not saying we should not be having a conversation given how gas prices are fundamental to so many things in the economy. Just an observation. You did bring up a recession and I have seen data to suggest that recessions often do correlate to sharp gas price increases. However, I know that correlation does not equal causation and the situation we have right now is unique. Let’s hope for continued growth that not too hot.
Seriously, gas price social media posts are ample. So many of them. Let’s hope for lower prices soon. I’m shocked at the pump, but overall I’m more concerned about all the other things put together rather than just gas. My main point here though is it’s easy to sensationalize gas prices and to put them on par with home prices. I just don’t see that being best.
Okay Gary, Stable on the gas prices. Hmmmm
Ryan on ANSI, I have been in some houses that the increase would be more than that. Down here we have some homes built by KB homes and they have bridges, stairs going up and down on two sides of the family room and other fun things. That will increase the home size by over 120 to 150 sf. Great for the agents who want to price the home by $/sf, but this is a little crazy. I have utilized the AMS way since it didn’t double count stairs. What makes this really nuts is FHA, Freddie Mac and VA are silent so far. So, I see some nut like me measuring a house under AMS for the other three, since I think it is a good way to go and then Fannie will be under ANSI and the home will be larger under Fannie and Smaller under the others. I heard a podcast today that said we may need to tweak this system of measuring a bit. Consumers (sellers and buyers) will have fit when they see their home on page 1 described as something different than what they believe it to be (and will probably never make it to page 2 with the grid. I see a fun time in the old town coming soon at a theater near you. I am not against having a standard, just think they selected the wrong one. Will see how this goes. Oh, just as reminder the new Desktop that came out last week for Fannie, doesn’t have to have ANSI standard for its floorplans, which of course can be done by someone other than the appraiser. Is it me or does all this craziness with the GSE’s always happen around the peak of the market? Remember 2006, when the GSE’s said yes, we think 125% financing is a good thing. Sure, am glad that was set up to help folks.
Thank you Brad. Yeah, that could be a problem regarding stairs. I think this standard can inflate the number. We cannot help it if people use PSF to price a home. But here we are going to be reporting square footage that is going to be used to make real decisions. For instance, I measured a house that hit the market this week. This was not for a loan, but I did it based on ANSI standards. I hate that the square footage was essentially boosted by 30-40 sq ft because of the stairs. But those are the standards.
I’m anxious to see what happens with desktops. I’ll have to write about that at some point. For any onlookers, Leigh Brown did a video on desktops recently. She is a Realtor and I think she has good points. I suspect some real estate agents are going to be lured into doing inspections and measuring houses, but there is liability here to consider. Check with your broker. Check with your E&O. Here is Leigh’s video. https://youtu.be/EXtx9AupQBs
Been doing ANSI for the past 4?+ years.
I love it.
Its easy, i dont have to mental gymnastics in the field to round to the foot or whatever and it almost always closes the sketch to within an inch or less.
Not one single party to ANY appraisal I have done with this has had a complaint or even a comment. I originally looked at it as making me blameless-I point to the standard and say-this is the standard-not me making things up-its a published standard and it immediately makes my GLA and basement and attic conversion non-GLA clearly understood.
Thanks Mark. And this is the good part here. It doesn’t make sense to not have a standard. This is a step in the right direction in my opinion. It just bugs me about the stairs. Otherwise I’ve basically been doing ANSI also. I have lots of blog posts talking about some of the ANSI issues too over the years, so it’s not like this is something revolutionary. One thing I actually like is that stairs go with the floor from which they extend. It’s nice to think logically about this and it will be a good thing to have appraisers on the same page about this.
Death Valley. I did a week long trip there 30 years ago. Can’t imagine much has changed. We hit all kinds of true ghost towns. Favorite place was Saline Valley. Pull up photos and you’ll see it’s unique. Built in hot tubs and sitting there watching US Navy fighters fly 100’ above the deck while we were drinking a brew.
Thanks Brock. We didn’t make it to that part, but I would love to check it out. Yeah, I suspect it looks very similar to what it did back then. What is striking is how few homes there are (makes sense though with 120 degree weather, hardly any amenities, etc…). I actually stopped in Trona, CA as a part of this trip. This area has some of the lowest prices in California. Lately they’ve had a number of listings at $20,000.
The below-grade square footage stuff is going to be interesting for my friends in Utah. Just about everyone has a basement there, so you often see homes that are 3500 sq ft, and they’re not actually that huge, because almost half is just basement (for a typical one-story). It’s going to take some getting used to for them to start talking about smaller home sizes!
Yeah, it gets really interesting in other markets where basements are prominent. They aren’t really all that common here. To your point though, this is where agents are going to need to understand how appraisers might be talking about the property. I wonder if there are implications for how square footage is listed in MLS and how it is advertised too… Here is a post I wrote about basements. I may need to go back and revise the language. In the past Fannie Mae has said appraisers can deter from the below-grade rule in various circumstances. I’m going to have to read their guide to see if they’ve updated their language. I suspect this is still the same, but it gets weird in the appraisal because the appraiser would basically report the below-grade area on a line that currently says “basement”. In short, there might not be any value issue at all, but the way appraisers report it is very clunky in my opinion. More on that later maybe. https://sacramentoappraisalblog.com/2014/05/27/can-a-basement-be-consdered-square-footage/
This Sacramento Realtor has a basement…errr.. below grade family room with wet bar. Like the east coaster I am, I use it and love it.
I’m confused that there’s both 1)below grade doesn’t count and 2) if it has 50% of it with 7’+ ceilings it does…
Thanks Steph. It sounds like an awesome setup. These are two different rules. Typically below-grade space doesn’t count in the square footage, but it can absolutely count in the value. But here’s the thing. I appraised a house in Orangevale that just went pending. I appraised it before it went on the market, and I explained to the owner that this could get a little interesting with the appraisal and lender because it was built on a hill, and half the house was technically below-grade. In my mind it is absolutely silly to call this space a basement because that’s not really what it was. But it is below-grade space technically. Here is an old blog post where I discuss basements more and maybe go into some details about below-grade. In truth I might have to revise this post at some point to bring clarity in light of some of the newer language from Fannie Mae and a focus on ANSI. https://sacramentoappraisalblog.com/2014/05/27/can-a-basement-be-consdered-square-footage/
Ultimately it’s pretty rare to have a basement included in the square footage though. But like I said, this doesn’t mean it cannot count in the value. My sense is buyers will pay for spaces they can use, and they really value extra space. But will a buyer pay the same amount for above grade space compared to a traditional basement? Maybe. Maybe not. This is where ideally we want to look to the market to tell us what buyers are willing to pay. This is a frustrating issue for owners and the real estate community, but from a valuation perspective it’s a viable and honest question that needs to be asked.
But there is an extra layer here that applies to any level – include below-grade space. The minimum ceiling height is 7 feet no matter what the level. This typically is meant for converted attics and such, but I think we can also apply this to a below-grade space. I once saw a house with an entire second story at 6’8″. This house had some truly awkward additions, and I didn’t count the entire second floor in the square footage because of the ceiling height. This doesn’t mean it couldn’t count in the value of course.
Does that make sense? If not, I’ll drink some more tea, and hopefully articulate myself more clearly. In short though, this is honestly not anything new. Appraisers have always had to figure out how to consider basements and what to do with areas with lower ceiling heights. But what is new here is there is now an official standard that appraisers are going to need to follow (only for Fannie Mae loans as of now). And what is also new is appraisers are going to be focusing more on using language such as “below-grade” instead of basement.
I also think a standard is necessary, Ryan. I have written about basements and how they fit into square footage for a while in the Birmingham area. I want agents to know how appraisers view them within the scope of the appraisal. Appraisers and agents must be on the same page as far as how these areas are counted because if they are not this could cause a big problem in pricing. If agents were to include the basement in the GLA and price the home like that then the appraisal will most likely not meet the contract price because the square footages were not similar. I think the long-term goal is to have everyone who measures homes (tax assessor, etc) use the ANSI standard, which makes sense because then we’ll all be comparing apples to apples.
Thank you Tom. This seems like a hot topic, and I know some appraisers are against this idea of a standard. I’m with you though that it’s a good idea to have something. Is ANSI the right move? I think time will tell. I like most of ANSI. There are just a few things that bother me. 🙂
Unfortunately higher oil prices are going to be felt in all areas of consumption, not just at the gas pump. Food, any product made with plastic, shipping, etc. The real hurt hasn’t started yet. With rising interest rates, rising inflation, skyrocketing housing prices, and incomes that aren’t keeping up with inflation, affordability is going to be a big problem in the next few years in my opinion. Construction costs are out of this world, and there is still a shortage of labor and materials.
I’m glad ANSI standards are being adopted for consistency across appraisals. However, there is still a lack of education for real estate agents and homeowners as reflected in some of the comments on this thread and in my own experience. I have had to explain, as you have, time and time again that below grade areas do “count” and why a level has to be reported as below grade even if most of it is not below ground. Real estate agents are still under-educated in how appraisals work, which is very frustrating given that many I work with make twice the income I do, with an 1/8th of the education and experience. But, then again, I hate sales.
Thank you Shea. Yeah, we have some issues ahead for sure. It’s not gas alone, but everything collectively that we have to watch. I suspect affordability figures are going to be heading in the wrong direction with such massive price gains these past few months. I think 2022 has surprised quite a few people in terms of the depth of price increases.
I’d very much like to see agents and appraisers get on the same page. I recently attended an ANSI class locally, and I was glad to see our MLS send a representative.
Hi Ryan longtime listener firsttime commenter and I know this is an old post about square footage, but hear me out: a lot of people think there is a “housing shortage” based on units.
But a) new houses tend to be bigger than old, b) Ivy Zelman mentioned that updated Census data indicates less population growth and thus less need for housing than previously forecasted, and c) retirees tend to downsize, and we’ll have more retirees than normal as Boomers leave the workforce.
On the other hand, a) retiree houses may not be where younger folks want to, or need to, live for social or job reasons (though telework might offset that), and b) the rate of household formation has been low for years, so more people are scrunching into fewer households voluntarily or not, like young adults moving back home with their parents, so maybe the square footage per person has held constant or something, and you wind up with a bunch of empty houses in the Midwest and overly-full houses on the coasts?
Do you know if or how this square-footage-per-person stuff is factored into housing data? I’m thinking maybe there isn’t much of a housing shortage if calculated as square foot per person, rather than housing units per person or household? And if so, maybe we’ll see more inventory build up during the next recession if we aren’t in one already.
Hey there FCC. Thanks for the comment. I appreciate Ivy Zelman too. She is really smart. Honestly, I don’t tend to have access to data in that department, so I’m not really sure how they look at the numbers. It would be interesting to consider all of the above though. I would go out on a limb and think we’d have to look at bedroom count in all of this also.
Regarding Zelman, I’ve not heard her say anything about California having a shortage. There is a good possibility that some of the markets in the Midwest are going to have too many units. She could very well be correct in her thesis. Though having an oversupply in places like Ohio or Utah doesn’t mean anything for California’s supply situation. Time will tell.