Time adjustment in an active market?

[Verne Hebert]

In terms of the FNMA 1004ab form, what indicator of appreciation, and how much appreciation (what appreciation rate?) determines the change of selection from a "stable" to an "increasing" market on page 1?

I am curious how everyone deals with this issue.

I have a SFR sale I am working on now in a very active market with no sale-resales to determine an appreciation rate. I know the market is increasing but I can't prove it with rate data. The sales price is considerably higher than my adjusted range, the cost approach is way low. Data is very dissimilar but proximate, and typical to better than typical. Sales in July, March, and February. 49 sales over 12 months, only 19 listings in inventory in the market area.

 

[Ted Martin]

What's happening in your land market?

 

[Verne Hebert]

Good question.

It is similarly proportional. 21 sales, 5 listings. This is a compounded problem. My post was just in terms of the 1004ab.

Land has been absorbed over the past twelve months (21 sites). Land Inventory is "boney". ...................And construction labor is almost impossible to find. A building department exists in this town. They are backed up 8 to 10 weeks for plan check.

I WORKED ON THIS, THIS MORNING A LITTLE MORE AFTER A GOOD NIGHTS SLEEP. A VERY INTERESTING SITUATION EXISTS. THIS PROPERTY IS THE ONLY AVAILABLE PROPERTY IN THE MARKET VALUE RANGE IN NEAR NEW (7 YEARS EFFECTIVE) CONDITION. SO DO YOU WANT IT OR NOT? IN TERMS OF MARKET VALUE BY DEFINITION THIS CREATES AN INTERESTING DILEMMA.

TWO BACKUP OFFERS IN PLACE. THE ONLY LINE LEFT TO ADJUST IS DESIGN AND APPEAL. I NORMALLY DO NOT USE THIS LINE-I CONSIDER IT A "SUBJECTIVE" LINE ADJUSTMENT THAT MOST OFTEN CANNOT BE SUPPORTED.

BOTTOM LINE QUESTION-WHEN INVENTORY GOES TO ONE, HOW DOES THIS CORRELATE TO THE DEFINITION OF MARKET VALUE?-CONSIDERING THE PRINCIPLE OF SUPPLY AND DEMAND AND WHERE IS IT APPROPRIATELY ADJUSTED AND HOW?. HERE IS A GOOD EXAMPLE! AND I SAW IT LAST YEAR ON THE LOWER END OF THE MARKET IN THIS TOWN.
.

 

[Elliott]

Time adjustment in an active market is zero....
cause you've got lots of sales. Never make
time adjustments, your asking for trouble, and
that starts with T, and that stands for time.

elliott

 

[Mike Garrett RAA]

And, pray tell, who said "no time adjustments"? If you are indeed in a very active market where values are increasing substantially...you should time adjust and be able to support your value conclusion.

The problem usually lies in someone making a statement that the market is really active but there are no current sales. Good appraisers should be able to use time adjustments when necessary and fully support the need for such and the method used to determine what that increase in value is.

If you choose to take the easy way out then say the market is stable. Use only very current comparables and no time adjustments. A comment like " I am unable to prove any increase in value over the past 90 days due to a lack of data" is common. Personally I feel it is a giagantic cop out on the part of the appraiser.

Take my market, for instance. We can prove 6% to 8% annual increase every year for the past 6 years. MLS stats are published every year. Its on TV, on the radio, in the newspapers. Builders have been raising their prices nearly every month. But what do we do? We say the market is stable, use comps no more than 6 months old and then wonder why we have real difficulty in reaching the contract price.

Adjusting for date of sale is part of appraising. Unfortunately, it's a part that is either forgotten or grossly over looked. Funny how the lenders wanted us to do negative adjustments when the market was falling but scream bloody murder if we use positive time adjustments when the market is going up.

The best comp is "the exact same house, next door, that sold yesterday". From there everything could and most probably should be adjusted. I think!

 

[Mike Garrett RAA]

And, pray tell, who said "no time adjustments"? If you are indeed in a very active market where values are increasing substantially...you should time adjust and be able to support your value conclusion.

The problem usually lies in someone making a statement that the market is really active but there are no current sales. Good appraisers should be able to use time adjustments when necessary and fully support the need for such and the method used to determine what that increase in value is.

If you choose to take the easy way out then say the market is stable. Use only very current comparables and no time adjustments. A comment like " I am unable to prove any increase in value over the past 90 days due to a lack of data" is common. Personally I feel it is a giagantic cop out on the part of the appraiser.

Take my market, for instance. We can prove 6% to 8% annual increase every year for the past 6 years. MLS stats are published every year. Its on TV, on the radio, in the newspapers. Builders have been raising their prices nearly every month. But what do we do? We say the market is stable, use comps no more than 6 months old and then wonder why we have real difficulty in reaching the contract price.

Adjusting for date of sale is part of appraising. Unfortunately, it's a part that is either forgotten or grossly over looked. Funny how the lenders wanted us to do negative adjustments when the market was falling but scream bloody murder if we use positive time adjustments when the market is going up.

The best comp is "the exact same house, next door, that sold yesterday". From there everything could and most probably should be adjusted. I think!

 

[Blue1]

Take a look at current listings. Take a look at the listing to sale price ratio. In an active market it is important to apply the principle of substitution. Like Mike said, look at your historical sales, support you time adjustment by using all the above.

 

[Steve Owen]

And, pray tell, who said "no time adjustments"? If you are indeed in a very active market where values are increasing substantially...you should time adjust and be able to support your value conclusion.

The question really is, are values increasing substantially? Normally, the need for a market conditions adjustment (time) is proven by sales and resales of the same property. (It's one of the reasons you research past sales.) But, beware of property owners who improve properties before putting them back on the market, making it appear there was a substantial increase when, in fact, it was only marginal. Also, be aware that a typical percentage increase after holding a property one year does not necessarily equal the same amount increase after holding the property for three weeks. I'm with elliot on this one, in an active market you should have plenty of new sales, unless your market appreciation rate is very high, there should never be a need for a market conditions adjustment and making one will create more problems than you want. If your comp is a year old or so, then that is a different matter, I will make a market conditions adjustment many times in such a case.

Now, back to the question:

what appreciation rate?) determines the change of selection from a "stable" to an "increasing" market on page 1?

I have argued this point with some pretty good instructors and I have come to this conclusion. If the typical appreciation rate of real estate in the marketing area (found by research of sales and resales, beware of just using the list price to sale price ratio) is higher than inflation, or CPI then property values are increasing. Likewise, if the real estate appreciation rate is near the same as inflation, as it is in my market, then values are stable. (We don't want to think about declining, but, of course, it could happen.)

The logic for this line of reasoning is econ 101. If the homeowner is making a real profit, after inflation, then it is logical to think of their property as having increased in value. But, even if the numerical value of the house increases, there is no actual increase in value unless that increase outstrips the cost of living. It is the same logic you would use to determine the increase in any investment.

 

[Elliott]

So if its widely known that the market is inflating at 10%
a year, and the statistics support it, and the market
expects it.... so you inflated your sales
to reflect the magical freight train increase....and then
the market changes and goes down.
Haven't you dis-serviced your client??

It seems to me its like stock analysts who are
bullish...and say, look the market's been going
up 20% a year from 1993 to 2000, so its reasonable
to assume that there is some built-in percentage
in the market. That didn't work out did it.

I still think its essentially a mistake to adjust sales
for time for residential purposes, especially in an
"active market." Its not prudent when your dealing
with other peoples money.

elliott

 

[Mike Garrett RAA]

Good response, Steve, and I agree with most of what you have said. The exception would be your selection of a single property that has sold twice within, say, a years time period. Almost without exception these are not "typical transactions".

1. The property was purchased by an investor, usually below the market, and renovated. It is not the same or in the same condition at the time of both sales.

2. Divorce. We see this quite often. The stress of a new home both emotionally and economically is often too much and the marriage doesn't make it through the first year of home ownership. Bingo, a distressed sale.

3. Corporate move or job transfer. Most likely unexpected. House is purchased by employee relocaton department or, as is the usual case, sold below the market for quick sale.

For this reason, I prefer to use a much broader base in establishing the percentage of increase. First, I make it neighborhood or subdivision specific since there is a wide difference from location to location and price range to price range IN MY MARKET.

The MLS is a wonderful tool for creating this type of analysis. Step one...define the area, neighborhood, or subdivision. Step two...define the price range of the homes to be used in the analysis. Make it broad enough to reflect the market.

Do sales for a current time period. I like 6 months. You will come up with an average sales price for the period. Next change the dates to reflect a time period for the preceeding 6 months. Compare the average sales price. If the current period is higher then the market value is 'increasing", if it is lower the market is "declining". If it is relatively the same the market is "stable". The sample should always be broad enough to reflect the actual market and not a single isolated case.

We have found, in most single family residential neighborhoods of median priced homes, the increase has traditionally been from 6% to 8% annually. Inflation has been substantially less; therefore, we are in an increasing value market. This is not true for the higher priced homes...that market has flattned out and is considered stable at this time.

You can modify this technique to fit your market. Use a longer time period if necessary, make it model and size specific if you feel you have sufficient sales. What ever you do, realize that the market is the market. The data exists, find it, use it, benefit from it. Avoid using general MLS or overall numbers....to risky! Cite your source in your report also.

Finally, I also agree if you have very current comparable sales there is really no need to do "market condition adjustments". I still contend it is a useful tool that is generally over looked or not applied. Take a $250,000 home in an area where values have been increasing by 6% annually. That equates to a $1250 increase per month. A three month old sale might be $3,000 to $4,000 behind the market. We see this especially in new home sales which represent a major portion of our market.