2019: 1st Third Analysis

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As we enter 2019, with a slowing national housing market, trade wars, erratic stock market, tensions in the south pacific and in the gulf, and yield curve inversions, it's hard to see past the forest of new information. We want to provide you with basic countywide market trends and analysis to help you be better informed.

Why a third and not a quarter? Many of the markets that we cover in this report have limited data, which makes analysis difficult, yet we wanted to be able to provide some level of seasonal analysis. Quarter’s would be ideal, however, by extending the data to four months instead of three we gain 33% more data, and therefore more able to make reliable statements. It's odd, we know, but hopefully you find it helpful.

A note to begin: None of the above are singular market areas. In the two leftmost graphs are whole counties. They are placed together only because they have somewhat similar price ranges. Each of these areas has dozens of markets within them, and to represent the county trend as the market trend would be foolish. On every report that we produce we analyze the micro market of the subject and the surrounding competing markets when needed. However, to do this for a blog like this, would be to time intensive.

First up, let's look at Armstrong and Indiana Counties above (Armstrong: Blue / Indiana: Grey / 30 Day moving averages). These are both rural counties with some pockets of built-up areas (Indiana Borough, Kittanning, Homer City, Blairsville, Ford City, etc). Armstrong County as a whole has experienced typical seasonality, with a lower number of homes in the winter selling for slightly lower than the median prices would typically indicate, and a rebound towards the mean as we move into the late spring and the market begins to heat up. Indiana County, however, continues to struggle with low demand and a faltering median home price. While Indiana began to redound from typical seasonality, the month of April saw yet another decline. This is consistent with a now 2-year decline in home values in Indiana County. Leading this trend are the rural areas of the county, however, even White Township (the area just outside of Indiana Borough) has even recently begun to show signs of decline. Homer-Center School District is showing declines of as much as 7.5% per year, however, even the higher end homes of White Township are now showing a decline of 1.5% per year. Listing prices in Indiana County have begun to be in step with this (whereas a year ago they were increasing as prices were falling) however the degree to which listing prices are decreasing is lagging market prices similar to before. Overall, Armstrong County has a generally stable market, while Indiana County has weakening marketability (in part due to the past reassessment, more recent job closures, the declining population of IUP). While White Township had previously appeared to be resistant to this decline, it now appears to be moving with the county overall. It is possible that in the next year this trend could spill into the one area that has been resistant to the trend thus far: Indiana Borough.

In the year ending April 30, 2019, there were 451 sales in Armstrong County, while there are 227 homes currently on the market (Absorption rate of .166), indicative of a balance for the county which would likely indicate a continuing stable market. In the year ending April 30, 2019, there were 441 sales in Indiana County, while there are 384 homes currently on the market (Absorption rate of .096), indicative of an oversupply for the county which could continue to put downward pressure on home prices.

Next up, Butler and Westmoreland County above (Butler: Orange / Westmoreland: Yellow / 30 Day moving averages). These counties have mixtures of rural (Derry Twp and Karns City area for example) as well as very dense population centers nearer to the city (Cranberry Twp and Murrysville - not saying these are comparable, just having some similarity of density. Cranberry has experienced rapid growth in the last 15 years, which is in part reason for the higher sales prices) with wide ranges of appeal between them. Again, both are moving higher after seasonal softening in the winter months, however, Butler County with more sales is advancing more rapidly. Butler County has moved in a relatively steady direction from the winter lows, however, Westmoreland County appears to have had a week late March into early April. Reasons for this trend in relation to their neighbor Butler aren’t immediately apparent, but it is worth observing.

In the year ending April 30, 2019, there were 2,131 sales in Butler County, while there are 1,038 homes currently on the market (absorption rate of .171), indicative of a market in balance. In the year ending April 30, 2019, there were 3,768 sales in Westmoreland County, while there are 1,729 homes currently on the market (absorption rate of .182), indicative of a market in balance, or with a very slight undersupply.

Finally, the right two graphs are the 5 divisions of Allegheny County. These areas are highly complex, with massive differences in market areas even within these five divisions. Here we’ll offer the Absorption rate and linear regression analysis for the year ending on April 30, 2019, with current market data for listings.

Allegheny East (Dark blue line above) had 4,289 sales in the last year with a total of 2,050 properties currently on the market (Absorption rate of .174), indicating that supply and demand are in balance. It started as the second highest median sales price area and ended the third highest. This was the third fastest growing area of the five for that time period.

Allegheny North (Orange line above) had 4,246 sales in the last year with a total of 1,687 properties currently on the market (Absorption rate of .210), indicating that there may be an undersupply. This started and ended the first four months with the highest median sale price and had the slowest appreciation of the five areas.

Allegheny Northwest (Black line above) had 1,259 sales in the last year with a total of 472 properties currently on the market (Absorption rate of .222), indicating that there may be an undersupply. It started as the 4th highest median sales price of the four and ended the first four months as the second highest median sales price. This was the fastest growing median sales price of the five areas for the first four months of this year.

Allegheny South (Yellow line above) had 4,264 sales in the last year with a total of 1,492 properties currently on the market (Absorption rate of .238), indicating that there may be an undersupply. It started as the third highest median sales price area and ended the fourth highest. This was the fourth fastest growing area of the five for that time period.

Allegheny West (Light blue line above) had 937 sales in the last year with a total of 330 properties currently on the market (Absorption rate of .237), indicating that there may be an undersupply. This started and ended the first four months with the lowest median sales prices. This was the second fastest appreciating market over this period.

This data is isolated to the first four months of the year, coming off of the lows of mid-winter. Attempting to extrapolate this to an annual trend would result in enormous errors. Every one of the above areas for the year ending on April 30, 2019, experienced declining median sales prices and an increase in DOM over that time. The increases of the last 4 months have largely been seasonal, and in some cases have not corrected for the decline of 2018 (gray bars). Absorption rates above .20 traditionally indicate a sellers market, while absorption rates below .15 tend to indicate a buyers market. As you can see, Indiana is firmly in buyers market territory, while all but Allegheny East , in Allegheny County are in various states of buyers markets.    Why the decline?   On the macro scale: Days On Market trending upward would indicate that homes on the market are higher than the buyer pool has a tolerance for generally - and that isn’t just a Pittsburgh issue, that was the story of the real estate market across the United States in 2018. The new generation (Millennials) coming into the home ownership age bracket has more debt than any generation before due to climbing education costs and falling wages when adjusted for inflation. Paired with the fact that the Baby Boomers are rapidly approaching the median life expectancy (2025), unless something unforeseen changes, this will likely mean a few years of slower than typical growth - or possible decline, as demand stays lower than typical and supply increases.  Climbing interest rates in Q4 additionally put downward pressure on the real estate market across the US. Current forecasts indicate an increase of .25% over the summer off of their current 14 month low (note: an increase of .50% in the fall was paired with one of the slowest real estate markets in a decade).   On the micro scale: We expressed the reasons we believe for Indiana County above. The remaining counties have higher proximity to Pittsburgh and late 2018 saw the finalizing of the Amazon plans to build elsewhere, this may have deflated a small speculation bubble around hopes of development. We’re hopeful that a new distribution facility in Indiana County will provide some relief to the market. We also realize that there are very HOT markets in the midst of some of these declines, however, this is a bird's eye view of the region. Our area continues to move forward, navigating the transition from old industrial towns to what we are becoming. Leadership, investment, job opportunities, and creative thinking will be necessary to be successful.   Disclaimer: These graphs and analysis are based on all data available in these markets, REO, estate sales, distressed sales, and others. Micro-market trends can have huge impacts on prices, and these trends should not be extrapolated to all markets within these counties. Appraisals take as primary the immediate market area of those subject properties, and analyze differences of marketability that can change over the course of a tenth of a mile - much more those than can change from one end of a county to another.

This data is isolated to the first four months of the year, coming off of the lows of mid-winter. Attempting to extrapolate this to an annual trend would result in enormous errors. Every one of the above areas for the year ending on April 30, 2019, experienced declining median sales prices and an increase in DOM over that time. The increases of the last 4 months have largely been seasonal, and in some cases have not corrected for the decline of 2018 (gray bars). Absorption rates above .20 traditionally indicate a sellers market, while absorption rates below .15 tend to indicate a buyers market. As you can see, Indiana is firmly in buyers market territory, while all but Allegheny East , in Allegheny County are in various states of buyers markets.

Why the decline? On the macro scale: Days On Market trending upward would indicate that homes on the market are higher than the buyer pool has a tolerance for generally - and that isn’t just a Pittsburgh issue, that was the story of the real estate market across the United States in 2018. The new generation (Millennials) coming into the home ownership age bracket has more debt than any generation before due to climbing education costs and falling wages when adjusted for inflation. Paired with the fact that the Baby Boomers are rapidly approaching the median life expectancy (2025), unless something unforeseen changes, this will likely mean a few years of slower than typical growth - or possible decline, as demand stays lower than typical and supply increases. Climbing interest rates in Q4 additionally put downward pressure on the real estate market across the US. Current forecasts indicate an increase of .25% over the summer off of their current 14 month low (note: an increase of .50% in the fall was paired with one of the slowest real estate markets in a decade).

On the micro scale: We expressed the reasons we believe for Indiana County above. The remaining counties have higher proximity to Pittsburgh and late 2018 saw the finalizing of the Amazon plans to build elsewhere, this may have deflated a small speculation bubble around hopes of development. We’re hopeful that a new distribution facility in Indiana County will provide some relief to the market. We also realize that there are very HOT markets in the midst of some of these declines, however, this is a bird's eye view of the region. Our area continues to move forward, navigating the transition from old industrial towns to what we are becoming. Leadership, investment, job opportunities, and creative thinking will be necessary to be successful.

Disclaimer: These graphs and analysis are based on all data available in these markets, REO, estate sales, distressed sales, and others. Micro-market trends can have huge impacts on prices, and these trends should not be extrapolated to all markets within these counties. Appraisals take as primary the immediate market area of those subject properties, and analyze differences of marketability that can change over the course of a tenth of a mile - much more those than can change from one end of a county to another.

Fun Fact: What are those hard vertical lines? Those are agents not doing closings on weekends (pushing extra data into the other 5 days, and gaps appearing weekly around weekends - good for you guys keeping your families first in the real estate race!

The Housing Crisis: 10 years later (part 5)

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The prior 4 articles were written through our Facebook page prior to October 2018. Now that we are 6 months on from those posts, we want refer you to some great information written just after our series. In the prior posts we looked at the lessons learned, patterns and warnings of the 2007-2008 housing collapse. The previous reporting that we shared showed that many of the dangers that caused the 2008 collapse are still in place, and that many of the safe guards against it happening again have been slowly dismantled. While this has occurred, other portions of the market (consumer debt, student loans, international market weakness, and growing national debt, rising interest rates) have shown increasing weakness, beyond that seen in 2007. There are many factors that represent a head wind to the US economy and housing market in 2019-2020. If 2007 warns us of anything, it will be to watch out for increasingly unethical strategies by the banks to attempt to protect their bottom lines.

Housing starts have slowed in 2019 Q1, Days on market have increased, and price appreciation has flattened in the growth season nationwide. All while consumer confidence is falling, and jobs increases were lower than typical for the last 5 years.
https://www.cbreglobalinvestors.com/insights/americas-watch-april-2019/

Since our last post, numerous high end markets have seen significant downturns nationwide.
https://www.wsj.com/articles/wealthy-greenwich-home-sellers-give-in-to-market-realities-11555348468

40% of commercial real estate executives (owning a total of 2 Trillion dollars in property) believe the commercial market has peaked and plateaued. With market confidence falling 5% year over year. http://www.rer.org/Q1-2019-Sentiment-Index/

Canada’s housing market showed a 30% decline year over year. THIS is a brilliant analysis of the current market forces that are facing the US economy, and how higher Dow Jones levels are not the only thing to be watching:
https://seekingalpha.com/article/4240221-housing-market-crisis-2_0-jury-2018minus-2019

Since our last post, “the yield curve” has inverted (a historic measure of the difference between the 3 month and 10 year Treasury yields). This has been a historic indicator of recessions. https://www.advisorperspectives.com/articles/2019/04/01/a-historical-perspective-on-inverted-yield-curves

The current macro real estate market has significant signs of weakness that should not be ignored. Previously “Hot markets” (read also, “overheated”) will likely see the impacts of such corrections. Pockets of the greater Pittsburgh area, specifically higher end new construction, and areas that have experienced explosive growth of development, are likely most vulnerable to these trends if they become more wide spread.

The Housing Crisis: 10 years later (Part 4)

This post original appeared on our buisness Facebook page on October 8, 2018.

This post original appeared on our buisness Facebook page on October 8, 2018.

With the housing market cooling in major cities, with former fed chairs predicting major corrections, mortgage fraud risk rising, no document loans increasing, its important to remember that the safe guards put in place after 2008 have been slowly dismantled.

"Those who cannot remember the past are condemned to repeat it." ~George Santayana

The stock market and jobless rates looked amazing until 1 month before the collapse... but the underlying factors had been predicting a collapse for 1.5 years.

What went so horribly wrong? https://www.thisamericanlife.org/…/another-frightening-show…

The life cycle of a toxic asset: https://www.npr.org/se…/124587240/planet-money-s-toxic-asset 
https://www.thisamericanlife.org/418/toxie


The Housing Crisis: 10 years later (Part 3)

This post original appeared on our buisness Facebook page on October 1, 2018.

This post original appeared on our buisness Facebook page on October 1, 2018.

Mortgage Backed Securities/Collateralized Debt Obligations (CDO/CLO) are big complex ideas - but are simple when broken down. These "American Life" broadcasts discuss how money is made off of bad investments and when prices go down. And the article below discusses the CLO market as of June 2018... to quote their summary:

"As of June 30, the S&P/LSTA Index imputed default rate was 1.28%, the highest level in 2018 but still very close to the levels last seen in November 2007."

All while the housing sector of CLO's sees a decline, and the spreads are very reminiscent of Nov/Oct 2007. In short, if CLO's are any indicator, a market retraction on the order of 2008 may not make it to the 2020 that experts are predicting.

A look at the 2008 CDO market: https://www.thisamericanlife.org/355/the-giant-pool-of-money

1 year later, a look at the CDO market: https://www.thisamericanlife.org/…/return-to-the-giant-pool…

A look at now and the future:

A 2018 look at the CDO market: https://www.tcw.com/…/Monthly_Commenta…/07-10-18_Loan_Review

The NYC market is currently softening, with trends similar to 2009: https://www.cnbc.com/…/nyc-real-estate-becomes-a-buyers-mar…

The Housing Crisis: 10 years later (Part 2)

This post original appeared on our buisness Facebook page on September 24, 2018.

This post original appeared on our buisness Facebook page on September 24, 2018.

This movie gives a dramatic look at what we reported last week in a fun to watch, easy to laugh through, and deeply disturbing look at how bad the bad actors in the real estate market got. When you look at this in correlation to recent data that mortgage fraud is on the rise, it paints a difficult picture to look at.

The Big Short: a true story. Its well worth the watch.
https://www.imdb.com/title/tt1596363/

A look at now and the future:

Mortgage fraud risk spikes in Q2 2018: https://www.housingwire.com/…/46820-corelogic-mortgage-frau…

Four financial experts who called the 2008's collapse and their thoughts on the current market: 
https://www-barrons-com.cdn.ampproject.org/…/financial-cris…

The $1.5 Trillion student debt crisis:
https://www.forbes.com/…/student-loan-debt-statistics-2018/…

The Housing Crisis: 10 years later (Part 1)

This post original appeared on our buisness Facebook page on September 17, 2018.

This post original appeared on our buisness Facebook page on September 17, 2018.

What does the housing market have to do with plot of the movie "The Producers?"

One of the lies that was told during/after the housing crisis of 2008 is that "No one saw it coming!" However, some did, and warned the world loudly. Many in the financial markets knew and made billions. In the coming weeks we will look at the macro housing market, by looking back, and looking at lessons that we can learn. Now 10 years later, real estate professionals nationwide are warning that the lessons we learned in 2008 are being forgotten, and that the odds of another financial collapse are rising, and estimated by the majority by Q1 2020.

A number of great reporters have done an amazing job at presenting this information to the public over the past 10 years. We encourage you to take a listen/read/watch at this compilation of how the housing market of the United States brought the world to its knees, in hopes that we can avoid another collapse. When banks are allowed to bet against homeowners... its a recipe for disaster. With mortgage fraud on the rise and the legislation (Dodd Frank) that aimed to restrict this behavior targeted for repeal, you have to ask why?

A deep look at the 2008 crisishttps://www.thisamericanlife.org/405/inside-job

Looking at now and the future:

Two former Fed Chairmen predict a crash in 2020: https://www.forbes.com/…/4-financial-savants-warn-about-t…/…

Mortgage fraud on the rise:
https://www.housingwire.com/…/46820-corelogic-mortgage-frau…

Promises of Dodd Frank repeal continue: https://www.cnbc.com/…/trump-signs-bank-bill-rolling-back-s…

Is your house too big for the new buyer pool?

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Recent trends in national real estate are showing a rejection of the McMansions of the 1990-2000’s in favor of smaller, more efficient homes. At Town and Country we have seen this trend in new construction especially across the region, with large homes often having much higher costs to construct than the home is valued upon completion.

Baby Boomers, who grew up during some of the largest growth in the nation’s economy, built big as a general trend. Millennial, who have come of age in the turbulence of the economy since 2000, seem to not have the appetite for these larger homes and the larger costs that come along with them.

Nationally, a bubble appears to be forming/popping among these large homes, and our data supports that this trend will have a large effect on the market of large homes in the years to come (unlike many national trends of 6% annual growth or the collapse of 2008). If you plan on building a home in the next 5 years it is an absolute necessity that you get an appraisal BEFORE you sign a contract. It may save you hundreds of thousands of dollars.

https://www.businessinsider.com/millennials-vs-baby-boomers-big-houses-real-estate-market-problems-2019-3

What kills real estate deals? Part 1

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There is a misconception among both real estate industry professionals and consumers that appraisers “kill the deal” with reports that either come in below the agreed upon sale price or truthfully disclose deficiencies pertaining to the property.  That could not be further from the truth.

I received a call recently that proves this point. The call was from an agent that had represented the buyer for a property that was an estate located in Westmoreland County, PA. This property had a number of issues including possible mold, water in the basement, torn and very worn carpeting, peeling wallpaper, a 75 year old kitchen, open knob and tube wiring, and duct tape on the bathroom floor holding loose vinyl tiles together. In addition to the condition issues, the bathroom was in a unique location and was only able to be accessed through one of the 2 bedrooms or through an exterior entrance located on the rear porch.  As would be suspected, the house was not under contract for a large amount, but nonetheless, there was a willing seller and a willing buyer.

When talking to this agent about a totally unrelated matter, she thanked me for the report on the above referenced property. Taken a little aback, I was not sure why she was thanking me. She explained that somehow the sale went through after the appraisal was completed with no glitches in the process. She had assumed that somehow I made the appraisal “look so good” that no one complained. There were no requests for clarifications and no request for endless repairs.  After realizing she thought that I had completed a report that overlooked all the issues, I reassured her that there was no lipstick applied to the pig. Our job as appraisers is to report true property conditions, warts and all. That is exactly what I had done with this property.

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This opened up the opportunity to discuss that if we as appraisers supply a credible report that fully discloses the true condition of the property and its estimated market value in relation to those conditions, it does not have to kill the deal. However, more often than not, the lender sees the report and then decides that the property is not worth the risk or they refuse to lend unless repairs are made prior to the funding of the loan. In this case, the lender was a small local bank that offered portfolio loans- loans that are not underwritten by the GSE’s (Fannie Mae and Freddie Mac).  This bank chose to lend money on a property that was in overall fair to poor condition and where the appraisal report clearly disclosed all obvious deficiencies. Had this been through a different type of financing where the loan was underwritten by a GSE, it is certain that the loan would have not been approved unless some major repairs were made.

After having a great discussion on how lenders decide which properties and which borrowers they choose to lend to based on more than just the appraisal report, she stated that she would from now on educate other agents that I do not try to kill deals, I’m just doing my job.

Appraisers don’t kill deals.

Hidden/non-disclosed defects kill deals.
Sales agreements above the market value kill deals.
Uninformed buyers using the wrong financing kill deals.
Underwriters who choose not to assume risky assets kill deals.

If an agent is upfront and honest about the condition of the home, chooses appropriate properties for their CMA’s, and encourages the borrower to use the right financing - the appraisal most likely won’t be a problem. Being a great real estate agent takes a great deal of work and we applaud those who are constantly working hard to inform their buyers/sellers and improve themselves!

The real estate market works best when all parties (agents, brokers, loan officers, under writers, appraisers, buyers and sellers) are well educated, work hard, and are honest with each other. When any party fails in any of these regards, financial crisis is the the ultimate destination.

The real estate market works best when all parties (agents, brokers, loan officers, under writers, appraisers, buyers and sellers) are well educated, work hard, and are honest with each other. When any party fails in any of these regards, financial crisis is the the ultimate destination.

Series: How do I read an appraisal? Part 10

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Today we finally arrive at the section of the appraisal that everyone jumps to first: The section that contains the opinion of value. You can find the full form here: https://www.fanniemae.com/content/guide_form/1004.pdf

Before we get to how the opinion of value is determined, lets address a few different conditions that the appraisal could be made according to, at the lenders request or per certain standards. A report can be made:

  1. “As Is” - this means the property is appraised as it is, on the day of inspection. While sellers may put “As is” in their listing, IF they accept an FHA/VA/USDA or Fannie Mae backed conventional loan as part of an offer, they are accepting that the property MUST meet the minimum standards required to qualify for these loans. The appraiser must complete the appraisal per the standards and guidelines that the client/lender/government impose and in some instances, cannot be completed “as-is”.

  2. Subject to completion per plans - these are common among new construction, where the appraiser values the property as if it were built on the day of inspection of the land per builder specifications. The appraiser must have those plans and the materials list in order to value the property credibly.

  3. Subject to repairs - If a deficiency is noted in the report that does not allow the home to secure a loan (chipping paint on older homes for FHA/USDA/VA, exposed wiring on any government backed loan or conventional, leaking roof, etc) then the report will be made subject to those repairs being completed. That is to say, as if the repairs had already been made the day of inspection. (FHA/USDA minimum property requirements are located in section II.D.3.a-q of the HUD 4000.1 available here: https://www.hud.gov/program_offices/housing/sfh/handbook_4000-1)

  4. Subject to inspections - while appraisers can identify many issues that would raise red flags in the loan process, there are many areas of expertise that we do not have. A horizontal crack in a basement wall can be a sign of settlement and future problems, however, the cause, severity and cure are not within the appraisers expertise. An appraiser can note a ceiling that appears to have water damage, but the cause and cure are the expertise of a plumber or roofer. These items are called out for inspection by a qualified professional. The professional then gives their opinion to the lender as to any future need of repair, and the lender has the choice as to how to proceed.

Reconciliation/Opinion of value

After all of this data gathering, and data analysis, and dozens of items that haven’t been addressed here (Highest and best use analysis, comparable selection, statistical analysis, sensitivity analysis, survey analysis, depreciated cost analysis, etc), the appraiser has a group of numbers that they have to make sense of.

In an ideal world, the comparables would all adjust to the same number, and the cost and income approaches would all present the same number… but that never happens. For the sales comparison grid, weight is given to each sale as to the relevance of those sales in determining sales comparison approach to value. This weight is given based on a variety of factors, but most typically are based on the overall similarity of appeal of a comparable to the subject, similar locations, similar amenities, or close groupings of value indicators.

Finally, we have three numbers - The Sales Comparison Indicator, Cost Approach Indicator and Income Approach Indicator. If the appraiser feels in their analysis that one approach does not produce a credible result in this instance, that approach can be excluded and explained as to why. The appraiser then weights these approaches to value in determining the final opinion of value, giving weight to the indicators that they feel are most credible.

Some say, “An appraisal is just an Opinion of value.” However, after this 10 part series we hope that you see that the opinion of value that is developed is more like a Doctor’s opinion of your illness than just something plucked out of the air. No other party in the real estate transaction is held to such a high standard as the appraiser when it comes to their “opinion.” No other party has as much education in valuation, or required experience necessary to be licensed to develop these opinions. In fact, it is illegal for anyone other than a Licensed Appraiser to use the words, “Market value” in connection with their opinion of value.

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A closing thought

Appraisal standards (USPAP) require that we communicate only with our client, and the client is the party that engages us for the appraisal. So, in most cases, neither the homeowner OR the lender is our client - but rather a third party. If you have questions for the appraiser in these cases, the ONLY thing they can tell you is, “Please pass your question along to your lender and they will pass it along to me.”

This can feel like the “run around,” and many appraisers don’t like it, but sadly, it is currently what we must do. PLEASE, if you have a question during the loan process, talk to your loan officer. This person is there for that reason, and can answer many questions, and if not they can pass your question along to the appropriate parties, including the appraiser.

Series: How do I read an appraisal? Part 9

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We’ll come back to the bottom of page two of the URAR 1004 (found here: https://bit.ly/2IkOwqn) next week, but first we need to address the other two approaches to value. In the prior weeks we’ve looked at the top of page two which addresses the Sales Comparison Approach. Today we tackle the Cost Approach and Income Approach.

Cost Approach

A common error in the sales comparison approach is “A house is worth whatever someone is willing to pay.” A similar error might be, “A house is worth whatever it costs to build.” So many more factors affect value than this. Right now (Winter 2019) builder costs are quickly outpacing the market value of homes in our coverage area. Market values, over time, are affected by the cost of construction, but the cost of construction is far more volatile than market values.

For this approach, cost manuals are consulted to determine cost to construct new, and then depreciation (physical, functional and external) are subtracted, arriving at a estimated replacement cost of the home. Among newer homes the cost approach can be very helpful, however, Town and Country has regularly seen that the older the home, the less effective this tool becomes. It is interesting that some many lenders do not require this approach to be developed at all.

However, the cost approach, even when not as reliable of a market value indicator, can assist in determining other adjustments used elsewhere in the appraisal analysis.

Income Approach

This tends to only be developed with the subject property is an income producing property or is in an area where it highest and best use would be that of an income producing property.

This area is very small on the form, however it is deceptive. The analysis and work file required to perform this analysis properly does not fit in such a small space, and usually requires 2-3 more pages to be added to the report. However, in brief, the following is performed:

  1. The estimated rent that the property could produce is developed from numerous comparable rentals.

  2. The Gross Rent Multiplier (GRM) is calculated from comparable rental sales by dividing the sale price by the monthly gross rent. Example: a property that is similar to the subject sold for $50,000, and its monthly rent was $1,000 per month. The GRM would be 50. This is performed with multiple properties.

  3. Multiply the estimate rent for the subject by the GRM to arrive at the income approach indication of value..

This is very simplified, but a basic overview to understand the methodology behind the numbers in this section.

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