The following has been reprinted with permission from the Oregon Appraiser Certification and Licensure Board — Spring 2008 Edition - Declining Market Designations and Market Forecast Analysis by Larry Green.
Part 1 of this two-part series began with an explaination of the the current situation by looking at how Fannie Mae, Freddie Mac, and guarantor mortgage insurance companies gather their data and identify “declining markets.”
In Part II of Declining Market Designations and Market Forecast Analysis Larry Green will discuss several tools that are available to analyze market trends. These include:
- The methodology to calculate the absorption rate
- Days on Market (DOM),
- List to Sale Price ratio (%SP:LP),
- Sale-Resale of the same property,
- Real Estate Owned (REO) activity
The issue of a declining market designation is closely tied to employing supply and demand analysis. Identifying and measuring the market is undoubtedly one of the most important procedures for all appraisers to have a clear understanding. The appraiser must know the composition of the market.
Some elements of comparison could be: the taxing district, school system, government services, park district, library district, location – urban, suburban, and rural, fire and police districts, lot/parcel sizes, utilities available, quality of improvements, and all identifiable physical attributes, such as age, condition, vehicle parking, and accessory amenities.
Here is the methodology to calculate the absorption rate:
- Identify and evaluate the subject’s attributes,
- Define the typical prospective purchaser profile,
- Assume the subject property is being presented to the market and design a sales search that will count the number of properties in competition with the subject.
- Count the number of:
- Listings available that compete with the subject’s parameters.
- The number of comparable sales that have closed in the past twelve months and divide by twelve (12) for the average sales rate per month.
- Note if there is an unusually high or low number of pending sale transactions because it could be an indication of a market change.