What do you do to determine "declining market"?

[Kitarkus]

I have seen a wide variety of appraisals lately (reviews) and my URAR appraisals have brought me to an extreme array of market areas recently. I have never been one to shy away from the "declining" box even in better economic times, however, some of my recent assignments have made this seemingly simple task quite a complex one!

One indicator of declining market may be that there are more properties currently for sale in an area than have sold in the previous 6-12 months (simply supply and demand). Perhaps an individual can currently purchase a similar property for less money than he/she could 1 year ago....substitution. When an active market exists.....an appraiser can look at a property sales history and find that it recently sold for less than its previous sale...this makes life quite easy!

On the flip side.....many markets in my area have seen steady appreciation during the previous 10 years or more...and while these areas are in demand (relative to other areas)...they are not properties which resell repeatedly throughout a 10 year M/L span. It can be deduced that similar properties were selling at a slightly higher value approximately 1 year prior, however, this would mean that the house is declining relative to what it could have sold for 12 months prior.

I have found the question of a markets stability, appreciation, or decline quite a difficult one lately. There are times when this is clear cut, however, more often than not this requires a complex analysis. Some desirable "close in" markets which historically have been in high demand due to lack of vacant land and high quality dwellings, condition, schools, houses of worship etc.etc.etc. are....in my opinion....showing declining values. This has NOTHING to do with the "stability" of these markets. These areas are among the most sought after addresses within my area and this fact has not changed in this poor economic climate. The properties whcih are being sold lately (it has been winter here....and poor economy since October and before etc.etc) are often the least desirable properties. Regardless....similar properties of similar condition are selling for less $$ in these areas now than 12 months ago. Declining market? Relative to what? One year ago? 10 years ago?

I think that a reasonable person understands that given the current local and global economic climate combined with the credit market issues which have arisen, increased unemployment, and all other poor economic indicators have rendered "declining" values in nearly every market in America. The declining box on the URAR, however, does not seem to ask whether the subject market is declining "more" or "less" than other locales.

I have been making a decision.....explaining the hell out of it (often with multi page narrative on top of the 1004MC) so that if/when reviewed I can be properly understood.

I would LOVE to know your thoughts on the "declining" market box.....and how you decide whether to give it a checkmark...or whether you are able to justify stability. How? Why?

Thanks

Jason

 

[Michigan CG]

The Ask an Appraiser section is for the general public to ask questions. Your thread has been moved.

 

[MN Mark]

I really hate to oversimplify this, but what is asked for on the URAR is whether or not values are declining. How do the most recent sales compare to sales in the recent past? How do current list prices compare to recent sales for comparable properties? There's your answer.

You may consider a market to be "in decline" in various other aspects, which you could address in the comments, but the checkbox is simply asking for the value trend.

 

[Lee Lansford]

Lengthening days-on-market for current offerings...increasing DOM for sold properties...over-supply (best to compare, first, on an annual basis to avoid seasonal fluctuations)...declining trend in the relationship between average sold price and average list price...increasing (or, at least some prevalance of) REO/Short Sale activity...declining trend in average & median sold prices: this should do it.

 

[timd354]

Lengthening days-on-market for current offerings...increasing DOM for sold properties...over-supply (best to compare, first, on an annual basis to avoid seasonal fluctuations)...declining trend in the relationship between average sold price and average list price...increasing (or, at least some prevalance of) REO/Short Sale activity...declining trend in average & median sold prices: this should do it.

It is not always that simple, especially when markets are in the process of changing from a a declining market to a stable market or vice versa.

For example, I appraise in a county where the median sales price decreased by 36.1% from March 2008 to March 2009. However, the number of closed sales in March, 2009 increased 30.6% to 746 sales over March, 2008 when there were 571 sales, the number of pending sales increased 67.8% 1,210 pending sales from 721 pending sales over the same period, inventory on the market declined by over 60%, the avg DOM has declined to 102 DOM from 140 days and there is now less than 3 months of inventory on the market, which, by any reasonable definition, is a shortage of inventory. I say that this overall market has stabilized even though year over year median prices are way down, though a closer look would tell one that almost all of the decrease occurred between March, 2008 and September, 2008, and I can find no evidence of a decrease in median sales prices from December, 2008 to March, 2009 (in fact the median sales price rose slightly over this period, even though this is generally slowest time of the year for real estate in this area).....however, I am guessing that many people would call me crazy if I labeled this market as anything other than declining since it is off 36.1% on a year over year basis when looking only at median sales prices.

 

[MN Mark]

It is not always that simple, especially when markets are in the process of changing from a a declining market to a stable market or vice versa.

For example, I appraise in a county where the median sales price decreased by 36.1% from March 2008 to March 2009. However, the number of closed sales in March, 2009 increased 30.6% to 746 sales over March, 2008 when there were 571 sales, the number of pending sales increased 67.8% 1,210 pending sales from 721 pending sales over the same period, inventory on the market declined by over 60%, the avg DOM has declined to 102 DOM from 140 days and there is now less than 3 months of inventory on the market, which, by any reasonable definition, is a shortage of inventory. I say that this overall market has stabilized even though year over year median prices are way down, though a closer look would tell one that almost all of the decrease occurred between March, 2008 and September, 2008, and I can find no evidence of a decrease in median sales prices from December, 2008 to March, 2009 (in fact the median sales price rose slightly over this period, even though this is generally slowest time of the year for real estate in this area).....however, I am guessing that many people would call me crazy if I labeled this market as anything other than declining since it is off 36.1% on a year over year basis when looking only at median sales prices.

I see similar patterns in some of the areas I'm working in. Looks to me like prices came down low enough that buyers started coming back into the market. As the inventory was absorbed, values stopped their freefall.

I use year-over-year analysis also, in part as a means of accounting for seasonal variations. However, year-over-year analysis is also "slow" to catch up to market trends in a rapidly changing market. Something I tell my staff all the time is, "you are not obligated to accept bad information". Typically that refers to ignorant Realtors and some of the goofy data and/or unethical representations they make on some of their listings. But it could also apply to statistical data or a set type of analysis, which may be painting a picture that is outdated by changing market trends. As the appraiser you are empowered to make those types of judgment calls. Naturally you have to use sound reasoning and be able to back it up, but my point would be, I don't think you should feel obliged to use a year-over-year analysis if it doesn't paint the true picture as to what's going on in the market.

 

[timd354]

I see similar patterns in some of the areas I'm working in. Looks to me like prices came down low enough that buyers started coming back into the market. As the inventory was absorbed, values stopped their freefall.

I use year-over-year analysis also, in part as a means of accounting for seasonal variations. However, year-over-year analysis is also "slow" to catch up to market trends in a rapidly changing market. Something I tell my staff all the time is, "you are not obligated to accept bad information". Typically that refers to ignorant Realtors and some of the goofy data and/or unethical representations they make on some of their listings. But it could also apply to statistical data or a set type of analysis, which may be painting a picture that is outdated by changing market trends. As the appraiser you are empowered to make those types of judgment calls. Naturally you have to use sound reasoning and be able to back it up, but my point would be, I don't think you should feel obliged to use a year-over-year analysis if it doesn't paint the true picture as to what's going on in the market.

Mark, I make those judgment calls all of the time and back up those calls with sound judgment and data. Fortunately the underwriters at my best clients know and trust me, so I don't get questioned too much....but, I know that there are many lenders out there that would have a serious problem with an appraiser calling the market I described "stable", no matter what the actual evidence shows.

What happened in that particular market is that median sales prices have fallen so far that they are now less than 3 times the median household income, which makes housing very inexpensive considering the income levels in that area. Also, GRM's in that area have gotten down to around 80 in that area, meaning that investors can easily get a good postive cash flow on any rental properties they purchase now with interest rates being so low.

This is just one county in the DC area, there are some other areas which show similar patterns and some areas which are still declining, but it is clear that some areas that I appraise in have stabilized, at least for now.

 

[MN Mark]

Mark, I make those judgment calls all of the time and back up those calls with sound judgment and data. Fortunately the underwriters at my best clients know and trust me, so I don't get questioned too much....but, I know that there are many lenders out there that would have a serious problem with an appraiser calling the market I described "stable", no matter what the actual evidence shows.

Wasn't questioning your judgment. And yeah, I get what you are saying. Some underwriter somewhere goes to OFHEO or some other national site and thinks they've got the market all figured out.

As Mark Twain said, and as I've seen in a few people's signatures, "there's lies, damn lies, and then there's statistics".

I had an underwriter call me up questioning my statements about REO properties being present but not driving the market in one particular market. She informed me that her sources said there were 190 REO listings in the subject's community, which was a city of about 4000 people. You can imagine what 190 REO listings could do to a city of that size! She wasn't rude about it like some underwriters, but I had to explain to her that there were only about 90 listings total in that town, which, as I recall was an oversupply, but 190 REO listings was probably not accurate data. She started reading off some of the addresses for the supposed 190 REO properties, turns out her source had given her data for properties in, or near, the subject's community. "Near" in this case referring to a 30 mile radius.

I'm slowly learning to hold my tongue on some of these things. I used to give underwriters an idiot lesson when they questioned certain things, and sometimes still do, but I'm figuring out that it's probably good if they are questioning certain things. I'm able to back up everything in my report. Some of my less-than-qualified and less-than-thorough competition probably couldn't, and that can only bode well for me in the long run.