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Defining a declining market

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Mike Seward

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When the new forms came out, our friends at Fannie wouldn't define "complete visual inspection", so most of us defined it ourselves in the report.
Is anyone doing something similar for "declining market"?

"For purposes of this appraisal report, the definition of a decling market is one where..........?
 

Restrain

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No. Just set forth the facts in the Market Analysis section. Your analysis should provide sufficient definition of a declining market.
 

Mike Seward

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Thanks Ross and R,
I'm aware of the links and appropriate analysis.

My only question is is anyone defining the term in their report like some of us stata on page 3 what a complete visual inspection includes and what it does not include.
 

VolcanoLvr

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Washington
This is a prudent question/post.

What exactly is a 'declining market?'

IMHO a declining market has to be one where the home prices 'now' are below the average growth rate in a particular area. But who among us actually tracks the specific growth rates for specific property types and plots them on a spread sheet?

For discussion purposes, let's assume the average growth rate over the previous years has been 5% annually.

Then the run up began in 2005 which yielded growth rates of 10% (again for discussion purposes).

Now, if the average prices today have moderated to a level at what would have been the average growth rate (5%) had the run up NOT occurred, would that be considered a 'declining market?' I think not.

The mere fact that homes used to sell for "X" during the run-up period, and now sell for "Y" (a lesser amount) does not automatically mean that it's a declining market....again in my opinion.

It takes a fair amount of research to determine average growth rates and declines for specific properties, not just reading the MLS reports that don't break down their statistics into sub-markets.

I'll stand back now, and evaluate the upcoming responses!
 

Mark to market

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This is a prudent question/post.

What exactly is a 'declining market?'

IMHO a declining market has to be one where the home prices 'now' are below the average growth rate in a particular area. But who among us actually tracks the specific growth rates for specific property types and plots them on a spread sheet?

For discussion purposes, let's assume the average growth rate over the previous years has been 5% annually.

Then the run up began in 2005 which yielded growth rates of 10% (again for discussion purposes).

Now, if the average prices today have moderated to a level at what would have been the average growth rate (5%) had the run up NOT occurred, would that be considered a 'declining market?' I think not.

The mere fact that homes used to sell for "X" during the run-up period, and now sell for "Y" (a lesser amount) does not automatically mean that it's a declining market....again in my opinion.

It takes a fair amount of research to determine average growth rates and declines for specific properties, not just reading the MLS reports that don't break down their statistics into sub-markets.

I'll stand back now, and evaluate the upcoming responses!

Dave,

I like most of your posts but I think this one is a bit off.

My take is that the lenders would like to know if the neighborhood of the subject can be expected to be worth less in the immediate future.

Developing a graph that goes back years and saying we really are ahead of where we could have been and avoiding the fact the property will be worth less next month is in my mind a bit misleading.
 

Mike Garrett RAA

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Look at the boxes on the form (assuming you are doing a form report). Where does it say anything about a "declining market"? It references..."property values"

If you have sufficient data to indicate a decline in property values...report it. In my not so humble opinion, it should be specific to market area (neighborhood, subdivision, etc). A careful analysis of the data is needed.

Things such as expanding inventories, expanding days of the market, a widening of the list price to sales price ratio, and a declining number of sales are all symptoms... but in and of themselves do not necessarily indicate a "decline in property values". An absolute indicator would be a property that currently sold for less than a previous purchase price...assuming no physical change in the property.
 

Mark to market

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Professional Status
Certified Residential Appraiser
State
New Mexico
8 (not to scientific) ways to spot a declining market.

1) Half of the builders that you know have moved to a different state
2) You finally have the time to fix your computer, take some CE and do a declining market study
3) On the local radio real estate show they spend more time talking about stocks then real estate
4) A local real estate developer is heard stating that he would burn his latest development to the ground except dirt doesn’t burn
5) You haven’t had an out of state phone monkey call in 30 days
6) The local authorities are talking about tightening appraisal and lending regulations
7) The feds have opened a new field office to investigate mortgage fraud.
8) You spend more time on the Appraiser Forum then you do doing appraisals
 

Mike Garrett RAA

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Colorado
Now that I like, smile
 

VolcanoLvr

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Certified Residential Appraiser
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Washington
A 'market' is not a singular property...despite the protests of many RE agents, some MB's, and perhaps some appraisers. It's multiple properties, similar in size and utility, in the same proximity, selling over a relatively short time, that estabilishes the 'market.'

While Mr. Garrett is on the right track..."An absolute indicator would be a property that currently sold for less than a previous purchase price...assuming no physical change in the property"....it takes more than one property to indicate a 'declining market.'

Mark...that's why trend analysis is both important and difficult. I admit that I'm no expert in doing this kind of analysis, and want to learn how to do it properly and efficiently. That's the reason why it's important to utilize trends to know if area properties "can be expected to be worth less in the immediate future."

But when you say 'worth less', that needs to be defined precisely. And proper data must be used to determine what "less" is in terms of the market.

Granted, if area properties are consistently selling for much less that they were not long ago, it could be a declining market.

Determining uptrending or downtrending values works if the analysis data on specific property types is tracked over time consistently.

I'll circle back to my main point in the previous post....has the average price appreciation over time been sustained despite the current drop in sales prices, or have those prices actually fallen below the average historical appreciation rate? If the later, I would say it's a declining market.

The problem is a true declining market, IMHO, can't be determined by looking at snapshot prices 'today' compared to 'yesterday'....but over a sustained period of time in order to understand the price appreciation (or depreciation) trend line.

---
Another point to this discussion is FNMA has already determined areas in our country where 'declining markets' exist. What data have they used to make that determination?

They have apparently notified the lenders of those areas, but to my knowledge, appraisers have been kept in the dark as to locations. Then if the appraiser does not correctly report that market deficiency on a report (checkboxes & comments) based on their own analysis, their work can be challenged.
 
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