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Justification for Declining Market

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Dave Bernstein

Freshman Member
Joined
Jul 1, 2006
Professional Status
Licensed Appraiser
State
California
About two weeks ago I completed an appraisal on a SFR for a mortgage broker. I indicated to her before the appraisal that the subject's neighborhood had declined -12.8% over the past 12 months (-1.06% per month). When I did the appraisal I indicated the market trend on page 1 of the URAR as "declining." The neighborhood has not stablized and continues to decline. The subject is in a newer sub-division where it appears that every other sale is this neighborhood was either a foreclosure or REO property. The local newspaper has indicated that this particular sub-division leads the community in the highest percentage of decline in median home sale prices. My local MLS statistical data backs this up and supports the numbers that I used in my appraisal report for percentage of decline.

Here's the kicker- The mortgage broker called me up yesterday and told me that FNMA just changed their guidelines and she can't go 100% L.T.V. with her borrower unless I change my appraisal report to indicate that the market is "stable," not declining I told her that I can't do that because my research indicated otherwise and changing my appraisal report would be fraud.

She hired another appraiser in my area to do another appraisal on the property and he indicated in his final report that in his opinion, this particular sub-division and subject's neighborhood was "stable" He obviously supplied her with the report she needed to get her loan approved! I sent the other appraiser an e-mail with my research before he completed the appraisal. This other appraiser sent me his reply with his justification for checking the box "stable" on the URAR. His explanation is as follows:

"The box is for “arms length transactions” not REO or bank sales. You do not compare distressed sales with “arms length transactions.” Distressed sales are part of the real estate “submarket”. They are evaluated separately.

Per Dataquick: Some might point to the October-to-November increase as evidence sales have bottomed out, he continued, but we’ll need to see a sustained trend. We also saw November sales rise a bit back in the troubled market of 1994, well before it hit bottom. It’s worth noting, though, that sales financed with conforming loans have increased each month since September, and last month we saw signs that the jumbo loan problem, while unresolved, wasn't worsening."

My question is this- Does this guys logic make sense, or is he just blowing hot air? Am I missing something here? I feel that my research was thorough. When comparing median home prices which is an indicator of market trend in a particular area, you include all sales after filtering for similar physical characteristics as the subject property. I didn't realize that the market trend box on page 1 of the URAR was only for "straight" sales!? All comments would be welcomed.

Dave
 
After reading your post and taking what you have written at face value. I agree with you. For 2 reasons, The Principal of Substitution and the fact that the distressed sales are the predominance in that market area:peace:
 
Dang it that Rhinoceros person beat me to it.

Principle of substitution. IF here are 10 REO properties and 10 owner occupied properties for sale in the same neighborhood, which ones are going to sell first? What idiot would buy a owner occupied home for 20% more when he doesn't have to.

Also, in your research did you note the original listing prices of the homes vs. the current list prices? Bet you a buck that the people on the market for a long period of time have had price reductions on the MLS unless their selling price is what they owe on the property which in this day is very common.

In certain areas, REO properties ARE the Market, and are setting the trend for the rest of the homes....if REO properties were not considered, along with short sales then how do prices start going down in the first place?
 
That would depend. What are you buying for the "median" price. Are they the same house? In my personal experience, REO properties tend to need work. Most of the vacating borrowers seem to like to trash them.

So, the price may be going down, but are you actually able to buy like homes? Are the REO's truly competitive with the "regular" listings?
 
Segregate the REO and Arms length sales and then look at the trends. Once the market recognizes the REOs effects (assuming there is an effect), the Arms Length Values will likely decline.
 
The abundance of REO sales makes the market. Why would any knowledgeable buyer pay more for a property if there is a suitable substitute. This guy has no logic. He appears to be one of those appraisers who we lose business to because we're not willing to lie.
 
This is the PERFECT thread that shows why Appraisers will become less likely to be needed in the very near future. (alwayss need some Appraisers for the most difficult of assignments) To many have a great song & dance as to WHY they don't have to check Declining Market.

We continue to play right into what lenders are wanting. After the last mess they came up with Mortgage Companies & Licensing Appraisers They proved that didn't work Now lets see whats next.

By the way Country Wide is still doing loans. & for those of you foolish enough to work for them, LSI is going to cut your fee AGAIN!!
 
This is the PERFECT thread that shows why Appraisers will become less likely to be needed in the very near future. (alwayss need some Appraisers for the most difficult of assignments) To many have a great song & dance as to WHY they don't have to check Declining Market.

We continue to play right into what lenders are wanting. After the last mess they came up with Mortgage Companies & Licensing Appraisers They proved that didn't work Now lets see whats next. ...

What do you mean it didn't work?
It worked fine! :new_all_coholic:
Everybody was out there, busy, making money.
It's just that now they need to repay it -- Borrowers and Lenders both.

Next big thing will be the Official State-Approved "Elastic Imager"
The value reports will be provided either by the Realtor -or- Homeowner involved in each transaction.
Appraisers will be provided with a very tekkie "elastic imager", and required to affix the Seal from the imager on all value reports.

Simple, and we'll get $9.97 per report for our trouble.
.
 
Since we're checking 'Declining' on almost every report done in the greater Chicagoland area, we get our share of interesting 'stips.' Here's the funniest one today:

"Further comment on declining market, do you see the market CONTINUALLY DECLINING?"

(Exact, word for word, emphasis mine)

Now, I am only an appraiser, but a I'm sure no prophet. And that's basically what I told them.

Dave...
 
I think the other appraiser may just be right.

If including the REO sales with the arms length transactions brings the median values down, assuming the traditional sales in the mix are recent, than it is obvious the REO sales are in a submarket. If they were it the same market as the standard market sales, they would not affect your median values much one way or the other bringing them in or taking them out.

As for who would buy an arm's length sale over an REO, that's easy: Most regular, i.e., non-investor buyers. First lie of economics 101: "People act in their economic best interest". No they do not. People choose emotionally and come up with reasons later. My wife, a typical buyer, gets the willies at the mere mention of looking at bank owned houses for sale. Something about Karma or some such crud. Her reasons though don't matter, she makes them up after she decides she wouldn't want one.

Also, it sounds like this is a new neighborhood. A lot of these new developments had investors buying from the builder to flip. They got caught holding the bag, can't find a tenant, and were foreclosed on. Many of the houses, aside from the stigma attached of being bank owned, are not upgraded "warmly" - they do not feel "homey". Too much tile, too much white, too many echoes. Not to bring her up again, but walking into one of these places my wife quipped "It is like walking into a mausoleum. It was a $1,000,000 mausoleum, but she was right. It lacked all the special touches - outlets in the right place, colors that blended together, soft lighting, etc. - you'd find in a house meant for owner occupancy when built.
 
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