Rear View Mirror or Crystal Ball?

Appraisals are a report that indicates an opinion of market value for a property. It is a reflection of what has been happening up until a certain point (our effective date) and not what is going to happen or might be continuing to happen.

What has happened could be different from what is going to happen. There is a place in real estate valuation for forecasting, but when completing appraisals for mortgage lending, divorce, estates, bankruptcy and listing work, we look at the sales and trends leading up to our effective date. Most often, our effective date is the day we look at the house, but there are times when our effective date is a retrospective look at a prior date such as a date of separation for marital dissolution purposes or date of death for estate purposes.

In any of these cases, the effective date that reflects the estimated market value is a culmination of the data analysis in the market leading up to that date. In other words, we are always looking in the rear view mirror to determine our opinion of value.

Over the past year, appraisers ran into situations where our rear view mirror was not equaling the rapidly changing markets. Houses were being listed and within less than 24 hours, sellers had multiple offers to choose from. Some of those offers included a percentage above the list price that seemed ludicrous, but buyers were desperate to get into a house and were getting discouraged by running into rejection after rejection so they were making very attractive offers. Inventory was low and this created the perfect storm. If you had cash and didn’t care about value, no problem. But if you needed a mortgage, the appraisal needed to reflect that it was worth what the buyer was willing to pay for it. In many instances, the history of sales did not make this possible. It either forced the buyer to bring the cash to the table to make up the difference or go back at the drawing board and start searching again.

Market value looks at how these actions between buyers and sellers have affected the climate in the market and use the sales that have closed as indicators of value for the property being appraised. It isn’t until you have an accumulation of data points that indicate buyers and sellers are reacting in concert that you have the ability to point to a changing market. In rapidly changing markets, it is challenging to correctly interpret the data and accurately reflect those changes. Those changes being reflected are not to be understood as an indicator that they will continue to happen, only that they have happened.

Market Data Analysis: Declining Markets

Telling someone that their house has lost value won’t make many friends, but it will distinguish you as a real estate professional if you can analyze a market and be honest. The national news has talked about housing prices increasing yearly for nearly a decade now, and some areas of greater Pittsburgh has matched those trends at some times, others have remained flat, and others have declined. Today we look at some declining markets, and how to use simple tools to visually determine if there is a decline, and at what rate.

The above is the national median sales price trend since 1990 vs. the builder cost trend. We can see the slow down in real estate around 1990, the decline of 2008 some possible trends emerging now. However, the first thing that we should note is that VERY FEW areas in the greater Pittsburgh area have seen increases this aggressive. SO, before any seller says, “I bought my house 3 years ago, and houses have gone up nationwide by 3% per year… so my house is worth 9% more?”

The above are homes that are from across Indiana County that are of a higher quality construction. This is not merely a limit of, for example $200,000 and above (limiting a data search by a hard number like that will skew the results of the analysis). In appraisal language, these properties are all Q2-3 homes (For the definition: http://www.bradfordsoftware.com/uad/UAD_Glossary.pdf)).

Over the last 3 years (after a reassessment in Indiana County that sparked a spike in selling, and reduction in property values) the above data points represent the higher quality sales across the county. Once selected, these sales (with sale date, sale price, and original sales price) were placed in an Excel Spreadsheet. The data points were then graphed and a trend line calculated for each using the tools within Excel. We observe a few things above:

1. There is a clear convergence of the scatter plot around a downward trend (with the exception of a few recent sales. Those two sales were some of the largest properties in the analysis, and one of them sold 23% below the original list price and stayed on the market for 2 years).

2. The trend line indicates a median decline of $19.45 per day. When calculated with the median sales price of $325,500 this comes out to an annual decline of 2.18% per year among these homes. This is then a starting point from which we can refine the decline - however, this is a great starting point from which to make sure we’re taking a possible declining market into consideration.

3. From other analysis of Indiana County as a whole, we’ve seen that some of the hardest-hit areas “may” be finding a bottom. There is the possibility that those recent high sales will result in a similar possible turn OR those recent lower sales would indicate that the decline continues. In six months, we’ll know for sure what is happening right now.

That is perhaps the most frustrating part of market analysis. Its always rear looking. While our “gut” might tell us that the market is “hot,” data is needed to be a professional. Look at the above graph one last time. The original list price trend is falling at 3.98%, 180% faster than sales prices. Why? Because sellers and their agents were way off 3 years ago, and are only recently starting to get to close to realistic sales prices. Our gut is susceptible to “confirmation bias,” in this case, the desire to see a stronger market than what really exists.

Do yourself a favor,

1. Run the data on your market areas on at least an annual basis to stay on top of what the markets are really doing.

2. Read our county reports that we distribute throughout the year for wider trends.

3. Stay abreast of the national market data, but don’t put too much weight on it.