How to define a declining market?

[Midwest1]

Does anyone have a clear definition of how a declining market is defined? Real estate markets fluctuate in value which is no secret so modest up or down trends are typical. The question would be what most appraisers consider relatively stable vs. declining or increasing.

I was at a seminar on the new 1004BS ....ooops i did it again...i mean 1004MC a few weeks ago and the instructor said his feeling is a less than a 10% change over a year is considered stable. that seemed a bit generous.

So, since I want to meet the threshold of what my peers would do...I am putting the question out to my peers. what % change and over what time frame are you using to define Declining, Stable or Increasing??

I know there are market specific variances but I am throwing this out in general terms for your thoughts.

Thanks!

 

[Riick]

AFAIC, if the stats are from large enough group to be valid, I've reported declining
with as little as 4% a year change.
Maximum I've seen locally is 10-11%/yr.
Don't know who your instructor was, but in my book, a 9% reduction on
a $400k house ($36,000 - enough for a pretty nice car) is a significant decrease.

 

[Wes Simons]

Ok - so, declining market. Fannie Mae is saying that the neighborhood section on page 1 should coincide with the new 1004MC. We've always used the neighborhood section to report data based on TOTAL sales in the neighborhood/subdivision. The new 1004MC is clear that is should be based on COMPARABLE sales/listings. How is the market defined when comparables sales(homes between 2800-3400sqft) do show a decline (9%) but PREDOMINANT sales(homes between 2600-3000sqft) show stable?
We've always been reluctant to mark declining in the neighborhood section-page 1 when the majority of data shows stable. With this new form-it appears Fannie Mae would define the neighborhood section as declining based only on comparable sales. We have significant sales/listing data for the areas we appraise in - so there is enough data sometimes to see comparables suffering but the majority stable.
Maybe we are being too "general" in the neighborhood section?? Is any set of declining data enough to mark the entire neighborhood as declining?

 

[DMZwerg]

Does anyone have a clear definition of how a declining market is defined?

(Note that at this time I am still technically only an "appraiser trainee" but I have been the firm's tech guru and numbers man since I joined (aka, tracking data and trends).)

Well, I look at my graphs of real estate values I have been tabulating for years now (some quarterly, some month by month) and note significant deviations from seasonal norms. This gives me a quick indication whether the market is increasing stable or declining. Deviations less than a couple percentage points down and less than say 7% up would tend to indicate a stable market and beyond that potentially one of the others. By utilizing graphs (one for each major city in the area and one for each county ... others created as needed) I can tell the difference between seasonal variances, temporary blips, and general trends.
For example, my boss just got a call from a client stating they had heard the market was increasing and whether or not he should reconsider his statement of a declining market. Well, he had done the appraisal before the 15th of the month (when I update the graphs due to 10+ day lag times in recording all sales in local MLS) so he hadn't included the previous graph that had shown an uptick in January. I ran February through and sure enough that months average, median, median of upper half and median of lower were all back down around December's low. This indicates the market was NOT stable as a sudden uptick then downtick of that percentage historically is very rare and therefore since the trend is not increasing and obviously not stable a cautionary statement of "has been declining and has not returned to stable conditions" was clearly indicated and the client was clearly basing their opinion of "increasing" on the previous month's blip. Note the blip was still under February values from the prior 4 years or so.

Now there re faster and easier ways to determine it other than graphs. One way is to grab a statistically significant recent sample (aka, if in a busy metro area maybe the last 30 days, if moderately active maybe the last 90 days) and compare the values to the previous time period as well as the same time periods exactly 1 year ago. Now you have four pieces of data from which to base a trend on, most recent, next most recent, and same one year previously and since seasonal trends tend to fall within similar periods (+/- 1 month) using the two adjoining parts you can try to eliminate seasonal trends on values (if you feel 2 years are not sufficient go back a few more years and do a quick chart or graph of averages). Now you can look at how much things have gone up or down from one period to the next based on seasonal norms as well as what the current overall trend seems to be. If your market is active enough (a very large city for example) then a radius or neighborhood search yielding 30+ properties in each search can be used to really define the local neighborhood market. Below 30 properties reduces the accuracy of the trend indications too much.

Hope that helps a bit.

-D. M. Zwerg

 

[DMZwerg]

Maybe we are being too "general" in the neighborhood section?? Is any set of declining data enough to mark the entire neighborhood as declining?

30 properties is a good rule of thumb.
If you have fewer than 30 properties then the statistical chance of the data being in error starts rising too much to be useful and things become more pure intuition rather than backed by significant statistical relevance.
Note also that the tighter you make the range (neighborhood, house size in sf, date of sale) while still maintaining the 30+ properties the better the data will be ... especially if you can eliminate distressed properties (foreclosures, etc) from the data sample.

One thing I note from your example is that the declining market is not a fully contained subset of the stable market.
"(homes between 2800-3400sqft) do show a decline (9%) ... homes between 2600-3000sqft) show stable"
In such a case the various subsets (2600-2800, 2800-3000, 3000-3200, 3200-3400) may each be significantly different and the 2600-2800 market may actually be INCREASING compared to 2800-3000 having a slight decrease and the other two decreasing significantly more, in which case you may be looking at 2-3 unique market segments that each need their own treatment (if possible). Therefore, again in the case above, I assume your subject is 3100sf thus making 2800-3400 +/10% of size, so why is 2600-3000 predominate and why did you do no examination of the 3000-3600 range to verify the supposition that homes above the predominate size are declining?

In other words market segments can do wildly different things. Below predominant size can do one thing, above predominant totally different, and there can be any number of subgroups withing predominant size doing different things as well. Maybe that is the point of the new form, to raise appraiser awareness of both local markets and what truly constitutes the exact local market? Just a thought.

-D. M. Zwerg
(Mathematician)

 

[narizona]

although there is no standard industry definition, a declining market is considered to be any neighborhood, market area, or given region that demonstrates a decline in prices or deterioration in other market conditions as evidenced by an oversupply of existing inventory or extended marketing times. source mortgage letter 2009-09. and if anyone gives you crud about it tell them to contact HUD to change there view of a declining market definition.

 

[SmithfieldWainwright]

I wonder what Fannie and Freddie "AVM"s would answer the question!

 

[narizona]

I wonder what Fannie and Freddie "AVM"s would answer the question!

they don't. i can't even guess on how many times i had to tell a lo on setting the basic data search requirements needed to fine sales close to the subject. like no you can't use that 3000 sq.ft home, where the subject is 2000 sq. ft. you know what i mean. what so sad is that if fannie and freddie followed there own guidelines, we won't be in this mess today, that were in, where i think will get worse. they just adjust those avms to hit there numbers. and the whole thing happens all over again.

 

[CigarDad]

what % change and over what time frame are you using to define Declining, Stable or Increasing??

At the top of the super secret "market adjustment numbers" cheat sheet, right above "adjust lot size differences at $1 per square foot", it says it must be greater than 5% for the form to be checked declining or increasing.

 

[The Nightfly]

Along the same lines...how long does a trend have to point in one direction? I'm seeing huge declines in average and median values in 4th quarter 2008, but nice a nice recovery in 1st quarter 2009. Now...if 1Q 2009 is still lower than 1Q 2008, but much higher than 4Q 2008 - is it declining or increasing? Do most appraisers look at markets seasonally or linearly?