This argument is another example of how the GSE guidelines and format algorithm has bastardized the appraisal process. The source of the argument is the FNMA/guidelines/formatted-form system that drives the process and how to reconcile the GSE format contradictions to CYA.
As I see it, you guys are missing the essence of the economic age life concept. In my view the concept is a method of describing the market and neighborhood trend. The effective age is just one component of the process. For example, we have a large neighborhood consisting of four room houses built by a local textile mill in the 1920’s. Similar houses were constructed at the same time on the opposite side of town. So lets look at the economic age concept to analyze these two neighborhoods and the market’s reaction to them. The first area has an average property value at $40,000. Lots contribute 15% of total property value so lots are valued at $6,000. That leaves a contributory value of the average improvement at $34,000. The estimated replacement cost is around $55,000. That indicates accrued depreciation of $21,000 or 38%. So with an actual age of 70 years that is an average of .54% depreciation per year, which indicates a total market derived total economic life of 185 years.
On the opposite side of town the average price of the houses is $25,000,which shows a rate of depreciation of $30,000 or 54%. That shows a total market derived average annual depreciation of or .78% per year, which indicates a total economic life of 128 years.
These numbers are based on neighborhood averages. What this means is neighborhood # 1 is very stable and # 2 is stable but far inferior to # 1. This answers one question, remaining economic life as expressed by the market for mortgage loan purposes is fairly safe. These houses range from original condition to being completely remodeled. So what is the effective age? I say it is a moot point but the point of reference should be market derived as how the subject fits into or is bracketed by the neighborhood ranges. The houses in original condition selling at $25,000 may have a remaining economic life, in comparison to the neighborhood averages, of say 85 years which would shows a market derived effective age of 100 years. The remodeled houses would in comparison have an effective age of around 70 years and a remaining economic life of 115 years. So the effective age range is 70 to 100 years. Once you establish the scale range you can place the subject by bracketing it. Again, this does not mean the neighborhood will last another 115 years; this is just a method of using ratios to describe the neighborhood trend. Effective age is relative to the neighborhood trend. A house could be remodeled and in poor condition. Effective age and condition are two different questions. Both come from the market. Poor condition adjustments come from the market.
Appraisers should spend their time appraising and not playing cat and mouse games with the GSE formats and its enforcement system. All the clients want to know is the estimated market value and some indication of remaining economic life based on the market derived neighborhood trend. That is the best we can offer. The alternative is some off the wall subjective theory based on the appraisers vast knowledge and experience. If there is some social, governmental, environmental, or economic force at play that would indicate otherwise the market data should indicate it unless it the change has taken places since the sales took place.
These numbers seem unrealistic which is the source of the problem. If I did an FNMA appraisal using these age life numbers some reviewer would swallow his chewing gum. So, to play the game I must rig up something based on a total economic life “guess” that will past muster. So I say the total economic life is 60 years and the effective age is 30 years. But how can I explain a 70 year old house having an effective age of 30 years? Modern houses built 30 years ago would have to have an effective age in comparison of zero years. So the appraiser is left to debate this issue because this does not sound reasonable. It is perfectly reasonable if your theory is consistent. The theory is, this is a method of making neighborhood comparisons and the numbers should be viewed in that context. They are snap shots in time that explain the trend.
