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Declining markets in CO / a serious analysis

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Mile High Trout

Thread Starter
Elite Member
Joined
Feb 13, 2008
Professional Status
Certified Residential Appraiser
State
Colorado
Look, let's get serious here. If appraisers can't answer this question, who can? Take a moment to read my thoughts on distressed markets. I have developed very rational methods for determining a specific state of any neighborhood.

First, consider why the market is distressed. It's mostly because the bubble popped, and a lot of adjustable rate mortgage holders are defaulting, and ending up loosing their homes through foreclosure processes.

Second, consider the evidence of downward adjusting markets, & then the time-frame that these trends may continue. Mortgage default is a constant event, with so many adjustable rate holders. Many lower end / priced neighborhoods see more stark evidence of declines, due to a higher number of homeowners who cannot get their mortgage back on track. These homeowners are causing low spikes in market valuation, as seller distress increases, & people are willing to take substantial losses, to get out of these dramatically increasing monthly mortgage costs. The evidence of this is: a seperation from the normal 1/3 active 2/3 sold data for 1-2 years back, and a more prevelant up to or over 50% active to sold ratio, with more distress indicated in MLS listings. Listing histories also are strong indicators of weather that current market valuation is "market driven" or not. When values are still fluctuating, the hi / mid / low ranges see wider seperation in values. Many homeowners try to refi at expected rates, or hold on for a higher sale. Unfortunantly, these same homeowners are likely candidates for future seller distress, as they are not willing to accept current "market driven" pricing. Apply the whole of available homes, & sales through a mental "principal of substitution" process. You will start to identify what valuations are market driven, and what are not. If more than one homeowner sells their home for less, they have driven down area values, even if only temporarily. Be aware of private sales too. Many times the market is better or worse, than MLS indicated. With prevelent dissatisfaction with real estate personell, private sales may increase. In some areas sales come to a halt, while homeowners hold on, this is still a stable market, that may have future distress. You see much more dramatic valuation declines in lower / middle class neighborhoods where homeowners do not have as much financial umph to keep from taking losses, & having to sell. You also see more prevelant losses in any neighborhood in the low / mid home value ranges, than in the high. I suspect this is because many highest end home buyers, in any given neighborhood have stronger purchasing power, and hence, financial management strategies. Be careful about giving an increased value, even for the stable high end homes, because if low / mid homes are seeing distress, eventually the will be fixed and flipped, and the final sale value of high end homes could still decrease.

lastly, time frames: Having only completed reviews, & REO appraisals for several years in Colorado (one of the first states to experience the sub prime market failure), I find that seller distress comes in waves. You could analyze the market, determine weather seller distress is occouring, has occoured, or may occour. If it IS occouring, valuations are likely still on the drop, as homeowners have not accepted new, lower valuations, and hold on for more $. But as the principal of substitution holds strong, as long as someone is willing to take a loss, valuation will continue to decline. If it HAS occoured, an analysis of the market may reveal listing histories have leveled out on average (look at your subjects whole block of listing histories, not just the subject). If there is renewed uniformity in average pricings of hi / mid / or low valued housing, the current market may be considered to be "restabilizing or restabilized at lower, market driven values". This tells you the market is more likely to continue on a more normal trend of slight increases, or decreases, & the most dramatic drop in valuation has already occoured. If seller distress MAY occour, a conservative approach to valuation is warranted, but market evidence suggests that the neighborhood has shown some resiliency to the sub prime failure, or less homeowners there have taken adjustable rates, and a crash may not occour. Valuation is more stable in this case. Although be careful, because the principal of substitution still remains, and if there are competeing developments that are in distress, your subject neighborhood may eventually see streamlined pricing, with these competing developments, depending on similarities & ammeneties. From what I have seen in distressed markets, it starts slow, then takes off, be very aware of any indicators of rising seller distress. Even if values have not dropped, if there are disproportionate ratios of actives vs solds, the market may be primed for big losses. It is not unusual in CO to see an average of 25% overall valuation drops, in hi / mid & low, before the market may see restabiliztion, or actual market driven values.

Federal financial analysts have varied opinions on the effects of adjustable rates. The fed chairman speculates that these "waves" will generally affect the market from 8 months, to 2 years. Other professionals feel this time frame is optimistic, and homeowners may continue to default for many years to come. Many banks are not playing fair, and allowing homeowners out of these rates, but instead merely rehab their loan, and adjust their total adjustable rate cap. (is that the index cap? not sure). This is where a government bail out, providing FHA secured loans to many distressed homeowners may re-stabilize the market in much shorter time frames. This may not be enough, because many mortgage holders are "upside down" in their loans, due to liberal appraisal & lending practices. These people may still decide that to sit on the property for a decade, before value increases again, is not a good financial move, & eventually sell at the current market driven pricing, that could continue the trend of declining markets for x period of time.

Jeremy W Hall
Jeremy Hall Appraisals
Thornton, CO

m2: :icon_idea:
 
Joined
Jan 13, 2002
Professional Status
Retired Appraiser
State
Florida
Welcome Jeremy!

I won't get into my thoughts on this at this time, but I've been called part of the Chicken Little gang here for quite a while and I don't see this getting better for many more years. Then again, I'm in Florida which was the land of huge amounts of speculative flipping, fraud upon fraud, and now is the land of thousands of vacant houses with a questionable population equation and nobody recently seems to know whether it's increasing, staying about the same, or decreasing. I do know the prices/values are decreasing and don't expect it to stabilize yet.
 

Riick

Elite Member
Joined
Aug 14, 2007
Professional Status
Certified Residential Appraiser
State
Delaware
I've analyzed the easily available local MLS data to death, and it shows market is stable. HOWEVER... a lot of our MLS listings have no GLA information.

Once I segemented the GLA range (say 1700-2000 sq.ft.), and filled in the blanks (via county data) for neighborhood homes that were missing GLA #s....
..... AHA... market values down 6% in last 12 months.

The analysis ain't easy, and I've found sale-resales to be somewhere between Zero and None.
Current 5 month supply of listings in one local market is probably the most easily seen indicator.
(( Here, as elsewhere, during the boom, we probably had a 10 day supply at any one instant in time. ))
 

Ross (CO)

Senior Member
Joined
Jan 17, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
Wow, I've been told my postings can be a bit lengthy ! Maybe chop your paragraphs into smaller bites.

Here's something I saved from the Appraisal Scoop .com site a day or two ago. Look at pages 149-153. Remember, those zip code numbers (as declining) are the stated "opinions" of this one lender. Any single zip code can include many separate neighborhoods and/or market areas due to property ages (of construction) and designs, amenities and other hoopla.

Here: --- http://www.radian.biz/pdf/Radian Declining MSAs.pdf

Jeremy, are you a member of NCAREA ? Were you at their meeting a few nights ago on Monday evening ? I recall their speaker was to cover "analyzing market trends, and are they declining ?" .

Go here: --- http://ncarea.org
 

Mile High Trout

Thread Starter
Elite Member
Joined
Feb 13, 2008
Professional Status
Certified Residential Appraiser
State
Colorado
I'll check that out, thanks

Wow, so that's where stewart went. The membership dues are suprisingly affordable, in comparison to other organizations! Good advice. No I am not a member of any organizations at this time. It's the case of the honest appraiser making the least, with me. I've killed more deals for Ameriquest, & similar companies, over the past 3 years, than many appraisers ever completed.

In response to GLA & analyzed market data:

GLA is important for bracketing, final value checks, & to develop cost trends for isolated properties. When it comes down to tract home development, I feel a buyers perspective is the most effective tool to estimate valuation. Apply the principal of substitution, consider the upgrades, make credible assumptions, research listing histories of properties in question. It will be obvious if the homes are gaining or loosing value. Lately, realtor reporting regarding seller distress is light. If I've got no substantial evidence, I turn to listing histories. The main point to remember, when considering value is: What would a buyer pay for this home, right here, right now, assuming the buyer is fully informed of all market conditions, offerings, sales & concessions. Remember that many homes sold in the bubble at inflated prices, & GLA reporting can be skewed. Many homeowners came into low range homes at mid prices, and mid range homes at high range prices. This is where experience, & a good eye for overall home quality at a glance can be very benefitial. It feels good to assign the highest & best value to a home that deserves it. It also feels good to set the record straight, for an overvalued home. Homeowners can get pretty mad at me, but I'm sure that they are counting their blessings now that area values have crashed, & they are not in upside down in their home mortgage.

Having just got certified, I'm not sure where I should go...
I'm still in support of an appraisers union, & a push to get laws passed to insure that profiteers will not be able to take as high a percentage of appraisal fees. There should be laws to prohibit "administrative appraisal handling costs" from exceeding 25%. Homeowners should also be made aware that the appraisal fee is not necessarily the appraisers fee. As the momentum builds with the "predatory lending practices" movement, micro management of appraisers will become more prevelant, as well as lending management companies. It's important to remember that many appraisers don't get full fees.

Got to go. Thanks for the response.

Jeremy Hall
 

TJSum

Elite Member
Joined
Nov 12, 2007
Professional Status
Certified Residential Appraiser
State
Maryland
Yes the Market Analysis can be very time consuming, but it appears rather easy to me when compared with the analysis needed to assign supportable negative time adjustments. I posted this topic on another thread and am still looking for some good ideas to improve my approach.
 

Ross (CO)

Senior Member
Joined
Jan 17, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
Jaremy,.....Stewart was not the founder of the NCAREA in August 2005. The woman named Nancy Wyatt deserves full and robust acknowledgment for getting that (northern) group started ! There is another association centered in the Colorado Springs area which started in ~1991 and we were supportive in helping the northern group develop a foundation to launch and with equal encouragement from the state at that time. Do you know any appraiser peer acquaintance in the C/S area.....who might not be a member of our local group down this way ? If so, steer them toward us. ....

....Here : http://www.carea.net

Wow, if you "killed" as many deals for Ameriquest, as you say, I'm surprised that you were able to remain on their regsitry as long as you did. The archives in the Forum are rich with comments about that outfit !
 

rbrienza

Member
Joined
Sep 16, 2007
Professional Status
Certified General Appraiser
State
Colorado
Jeremy ... Mr Stewart Leech is in the Boulder county assessors office....
 

Dee Dee

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
Jeremy,

Welcome to the forum!

I noticed that you had originally posted these comments in another thread that was about an LO (or was it an underwriter? Sorry, I don't remember) requesting that an appraiser give a prediction as to when the declining market would be over in one of his appraisal reports. Based in that context, I'd like to make my reply.

I for one would NEVER give anyone an estimate of when currently declining market areas might hit bottom. There are simply too many wildcard variables on both the local and national level that could turn any "experts" most educated guess today into tomorrow's naive assumption and liability.

Lenders would love nothing more than to find appraiser "experts" willing to take on some of the risks involved in lending decisions or rollercoaster market values, so any appraiser bold enough to put their longer term forecast predictions into writing might end up being held accountable.

Though much of your original post has merit, I think that it's best for appraisers to protect themselves and only report and analyze their markets based on information that is currently at their fingertips.

Please do consider coming to the NCAREA meetings. They're a great way to meet some of your peers and get some CE hours in the process.
 
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