You need to understand that there is a big difference between "Neighborhood" (as pg 1 states) and "Market" (as 1004MC states)
Again, from a Neighborhood-Market Analysis found.
Appraising Residential Properties, 4th Edition contains discussions of "neighborhood" and "market area" on pages 36, 78 and 198. The statements contained therein indicate that data and analysis related to a neighborhood is broad and general in nature, whereas data and analysis related to a market area is specific and related to a particular property type or category.
FNMA Selling Guides are instructive. For example, statements are made which are in line with the previously considered information from Appraising Residential Properties regarding the differences between "neighborhood" and "market area."
• Section XI, 304.01. “in the neighborhood section of our appraisal forms, the appraiser reports on general neighborhood trends.”
This statement makes reference to “general” trends, as opposed to trends that are specific to properties that compete with the subject property.
• Section XI, 308. “If there is a lack of truly comparable sales in the neighborhood—either because of the level of rehabilitation or the relatively low number of sales transactions—the appraiser may need to analyze and use as comparable sales not only less similar properties from the subject neighborhood, but also properties from competing neighborhoods.”
This statement indicates that “truly comparable sales” are a subset of all sales in the neighborhood, and acknowledges that “less similar properties” may exist in the neighborhood. This illustrates that differences may (and usually do) exist between neighborhood data for one-unit housing, versus market area data for one-unit properties that compete with the subject.
• Section XI, 403. “Neighborhood characteristics and trends also influence the value of one-family to four-family residences… neighborhood characteristics, and neighborhood trends are determinants that the appraiser uses in the property valuation process.”
This statement illustrates that analysis of general neighborhood trends and characteristics influences the appraiser’s analysis related to the valuation of the subject property. Therefore, this statement indicates that two analysis should be performed, one to determine the “neighborhood characteristics and trends,” and another when the appraiser is engaged in the “property valuation process.”
• Section XI, 403. “Neighborhood characteristics. These can be addressed by the types of structures and architectural styles in the neighborhood (detached, attached, row or townhouse, colonial, ranch, Victorian, etc.); current land use (single-family residential, commercial, industrial, etc.); typical site size (one-eighth acre, two acres, etc.); or street patterns or design (one-way street, cul-de-sac, court, etc.).”
• Section XI, 403.02. “The degree of development of a neighborhood (which is referred to as "built-up" on the appraisal report forms) is the percentage of the available land in the neighborhood that has been improved.”
Section XI, 403.04. “Some of our appraisal report forms provide an area for the appraiser to categorize the predominant occupancy status of the neighborhood—as "owner" or "tenant" and as "vacant (zero to five percent)" or "vacant (over five percent)"—as part of his or her description of the neighborhood.”
• Section XI, 403.07. “The appraiser should report separately the percentage of developed one-family sites, developed two-family to four-family sites, etc. Undeveloped land should be reported as vacant. In addition, if there is a significant amount of vacant or undeveloped land in the neighborhood, the appraiser should include comments to that effect to ensure that he or she adequately describes the neighborhood.”
These statements indicate that neighborhood characteristics include data that is not specific to properties that compete with the subject. It would therefore be inconsistent for an appraiser to analyze and comment in the Neighborhood section on characteristics as noted above, and then to report one-unit housing and age data that is specific to properties that compete with the subject. To be consistent, the appraiser’s one-unit housing and age data would need to reflect all the types of structures and architectural styles in the neighborhood which are of the same type or category as the subject property (i.e., single family detached).
• Section XI, 403. “Generally accepted appraisal standards and our appraisal reportforms require the appraiser to research, analyze, and report on the factors in the neighborhood that may affect the market value or marketability of the properties in the market area.”
• Section XI, 403.02. “The appraiser must report on the primary indicators of market condition for properties in the subject neighborhood by noting the trend of property values (“increasing,” “stable,” or “declining”), the supply of properties in the subject neighborhood (“shortage,” “in-balance,” or “over-supply”), and the marketing time for properties (“under three months,” “three to six months,” or “over six months”) as of the effective date of the appraisal.”
• 04/2009 Appraisal Guidance. “In general terms, a “declining market” is one in which home prices are currently declining.”
• 2002 Handbook for Appraisers. “Your analysis of the neighborhood data must include trends in the supply of and demand for houses in the neighborhood… An oversupply of properties may be a neighborhood or citywide problem.”
In these and several other statements related to the neighborhood, FNMA references “property(ies),” “houses,” and “home(s).” It is notable that they do not modify the terms by preceding them with the word “comparable.” This is consistent with other statements in the FNMA publications which indicate that the neighborhood analysis is broad and general, and includes an analysis of all homes of the same category (i.e., single family detached).
• Section XI, 403. “The results of a neighborhood analysis enable the appraiser not only to identify the factors that influence the value of properties in the market area, but also to define the area from which to select the market data needed to perform a sales comparison analysis.”
This statement indicates that the neighborhood analysis is a separate process which enables the appraiser to subsequently perform the analysis of the subject’s market.
One of the purposes of the neighborhood analysis is to help establish the conformity, or lack thereof, of the subject property with respect to typical neighborhood characteristics. The FNMA Selling Guide addresses this when it states “The improvements should generally conform to the neighborhood in terms of age, type, design, and materials used for their construction. If there is market resistance to a property because its improvements are not compatible with the neighborhood or with the requirements of the competitive market… the lender should underwrite the mortgage more carefully and, if appropriate, require more conservative mortgage terms.” (Section XI, 405.01.)
If an appraiser fails to accurately report neighborhood characteristics, it is not possible to determine with certainty whether or not the subject property conforms to the neighborhood, thereby adversely affecting the lender’s risk analysis related to the subject as security for the pending mortgage. Several statements in the FNMA Selling Guides provide evidence of this
• Section XI, 403.02. “For example, if the typical one-family building site in a particular area (based on the zoning, the highest and best use of the land, and the present land use) is two acres in size, the mortgage will be eligible for purchase or securitization regardless of the percentage of the total appraised value of the property that the site represents—as long as the appraiser demonstrates through the use of comparable sales that the property is a typical residential property for that particular neighborhood.”
• 04/2009 Appraisal Guidance. “The lender must review carefully the appraisal report for properties that have sites larger than those typical for residential properties in the area.”
These statements indicate that FNMA is interested in determining if the subject property is typical, or conforms, to the neighborhood with regard to site size. This can be properly addressed only when the appraiser accurately reports neighborhood data in the appraisal report.
• Section XI, 403.05. “The appraiser must indicate the price range and predominant price of properties in the subject neighborhood. The price range must reflect high and low prevailing prices for residential properties that are comparable to the property being appraised (one-family properties, two-family to four-family properties, condominium units, or cooperative units) and, in some cases, for competing properties (one-family properties when the property being appraised is a two-family to four-family property or a condominium unit, or condominium units when the property being appraised is a cooperative unit)… the predominant price will be that which is the most common or most frequently found in the neighborhood… When the subject property has a sales price (or value) that exceeds the upper price range, the property is considered as an "over-improvement" for the neighborhood. The property is considered as an "under-improvement" if its sales price (or value) is less than the lower price range.”
• 2002 Handbook for Appraisers. “Report the prevailing high and low prices for single-family homes in the area... We consider the predominant price to be the price most frequently found in a neighborhood… If a property has a sales price or value that exceeds the indicated upper range or is less than the indicated lower range, the property may be an over-improvement or an under-improvement for the neighborhood.”
These are some of the most direct statements from FNMA as to what they want to see in the Neighborhood section. It is notable that, although they make reference to providing data for properties that are “comparable” to the property being appraised, in this instance “comparable” means homes of the same category; i.e., if the subject property is a one-unit property, then the data should be for all other one-unit properties within the neighborhood (not filtered to include data only for properties that compete with the subject property.)
Additionally, these statements illustrate that only the reporting of accurate neighborhood data for all homes of the same comparable category can facilitate the determination of whether or not the subject property conforms to the neighborhood with regard to home values, or if it is an under or over-improvement for the neighborhood.
• Section XI, 403.06. “The appraiser must indicate the age range and predominant age of properties in the subject neighborhood. The age range should reflect the oldest and newest ages for similar types of residential properties (one-family properties, two-family to four-family properties, condominium units, or cooperative units) and, in some cases, for competing properties (one-family properties when the property being appraised is a two-family to four-family property or a condominium unit, or condominium units when the property being appraised is a cooperative unit.)… The predominant age is the one that is the most common or most frequently found in the neighborhood… The age of a property should be within the general age range of the neighborhood. Normally, neighborhoods are developed over a relatively narrow span of time so that most dwelling units will fall within a particular age range. A property that has an age outside of the general age range must receive special consideration."
• 04/2009 Appraisal Guidance. “The appraisal must indicate the age range and predominant age of properties in the subject neighborhood. The age range must reflect the oldest and newest ages for similar types of residential properties… The predominant age in the neighborhood is the one that is most common or most frequently found… The age of a property should be within the general age range of the neighborhood… A property that has an age outside of the general age range must receive special consideration.”
These statements illustrate that only the reporting of accurate neighborhood data for all homes of the same comparable category can facilitate the determination of whether or not the subject property falls within the age range for the neighborhood, and therefore conformity with regard to age. As noted, FNMA uses this data in their risk analysis.
