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Dr. Sklarz mentioned in MortgageOrg article: Will Water Restrictions Out West Impact Home Values?

By Collateral Analytics |

Mortgage Orb

by Patrick Barnard on April 28, 2015

How will mandatory water restrictions in California affect property values?

That’s a question many people in the housing industry have been asking lately.

Earlier this month, California Gov. Jerry Brown signed an executive order requiring an unprecedented mandatory 25% cut in urban water use statewide. For now, the state is leaving it up to its urban water companies to work with their customers to achieve the 25% reduction in usage – in other words, there’s no proposal (yet) for the state to start fining residents if they violate the restrictions. What’s more, not every water company in the state must reduce consumption by 25% – those that serve areas that use less water or with more favorable climates for conservation will have lower restrictions – thus, some areas of the state will be more affected than others.

Although it will take some time to realize the full impact of the restrictions on property values (and what’s to say water supplies won’t return to historical norms next year, resulting in a lifting of the restrictions?), one can be sure that some prospective homebuyers have already crossed California off their list. With media reports stating that many homeowners will no longer be able to water their lawns, fill their swimming pools or wash their cars, it’s probably the case that some buyers who were thinking about California previously are now reconsidering.

Paul Abbamonto, chief operations officer at valuations technology and services company LRES, says while it’s too soon to forecast what impact the new restrictions might have on home values, “California’s drought and the resulting water restrictions out West are certainly factors to continue to monitor over time.”

In an interview with MortgageOrb, Abbamonto says the water restrictions could also impact re-sales, as “homeowners with swimming pools and extensive landscaping are suddenly at a disadvantage in today’s environment.”

“This issue could adversely impact home values in a few years if it continues,” he says. “If homeowners are required to empty their swimming pools or stop watering their lawns, it will be very hard for them to get full value for their properties under those conditions.

“And appraisers will have to factor in the possible penalties or sacrifices that have to be made, such as what is the future damage to an empty swimming pool,” he adds. “If a pool is empty, appraisers must note that in their report and set a provision that says, ‘subject to the pool equipment functioning correctly.’ Pool equipment is expensive and when it is not operated on a regular basis, it could malfunction which would factor into the appraisal.

Abbamonto emphasizes that although the “drought crisis is a major concern, it is still too early to see any immediate ramifications with regard to property values.” However, “if this continues to be an issue two to three years from now, the industry will clearly face a problem with respective values.”

Michael Sklarz, chairman and CEO of valuations solutions provider Collateral Analytics, says he sees “two sides to the California water restrictions situation relative to the real estate market.”

“Areas such as the Central Valley, which are heavily dependent on agriculture could see a direct impact on farming revenues which would negatively impact the nearby housing market,” Sklarz says (note: the new rules specifically exempt agricultural users from any new reductions for now). “At the same time, urban and suburban areas of California will continue to be perceived as desirable places to live and work. However, concerns about future water supplies will make it difficult for homebuilders to develop new housing.  With less new housing inventory, the result will likely be tighter markets and further pressure on home prices.”

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