Appraisal Scoop

Real Estate Statistics - Not Always What They Seem

Read enough about the Phoenix (or elsewhere) real estate market, and someone will start spouting statistics. And while market stats are important to understand, one must exercise extreme caution in interpreting them, or listening to others interpretations.

Let's take a look at "Days on Market" (DOM), or "inventory", or "months supply".  Whatever you prefer to call it, it is an oft-cited indicator of overall market conditions. And generally speaking, it's not a bad indicator. The supply of homes available for sale is a key component in understanding the overall real estate market conditions.

It is important to understand a few things though:

Our current market really consists of three major categories of inventory: 

1. Bank/lender owned homes (also known as REOs);
2. pre-foreclosure/ short sale properties; and 
3. "normal" properties (homes that are owner/investor owned and not in a pre-foreclosure status).

Real estate is local. And the Phoenix metro area is a BIG place. Any time statistics or price indexes are quoted for the entire Phoenix area, you have to understand that conditions across the Valley can vary dramatically. Even within a suburb, conditions can vary from subdivision to subdivision. Within a single large Master Planned Community, conditions can vary from neighborhood to neighborhood.

The supply of homes is a perfect example. The general consensus in the real estate industry is that a six-month supply of homes is considered a "balanced market". Less than a six month supply means we are in a seller's market and more than a six-month supply is an indicator that we are in a buyer's market.

At this moment in time, if you look at all the available inventory of homes across the Phoenix metro area, there is a 5.2 month supply of homes.

If you're a seller, you may be thinking, "Hallelujah! Phoenix is a seller's market!" and if you're a buyer you may be thinking, "Crap. I should have bought a home a couple of months ago when it was a buyer's market and I would have had more negotiating power."

Let's look at the categories of inventory that make up this number...

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The 1004MC-71 Industry Update Part 2; Frustration Turns To Panic

This is the second in a four-part series dealing with the new 1004MC form (MCF) by David Braun, MAI, SRA.  In Part 1 of this series, David began with a discussion of where appraisers are NOW . . .and gave some direction on where we're headed.  In Part 2, David's looks at appraiser's frustration with the 1004MC and in Part 3, he gives us a "What Goes Where and Why" look at the 1004MC.

I have been talking to a lot of appraisers who are getting a little uptight.  Consider that for most residential appraisers their personal financial position has been deteriorating the past couple of years because of a decreased demand for appraisals during the height of the housing crisis. Now, throw in the new requirement to perform a market condition analysis (MCA) on the 1004mc-71 form, while the work load is increasing.

The typical residential appraiser is in no position to turn down work.This scenario has left a good number of appraisers in a state of frustration and panic as they attempt, but fail, to produce a credible MCA in a reasonable time period. Some have reached the point that they say the heck with a credible MCA, I would be happy if I could just get the blanks filled in on the 1004MC-71 form (MCF). What should appraisers do to get over this hump?

My suggestion is to begin to think positively. Most appraisers (90% plus) can meet the challenges of performing a credible MCA on the new MCF. So, most all appraisers are stating a fact when they say, “I can do it!” However, there is a set of skills that has to be developed, each fitting together like the pieces of a puzzle.

Let’s talk about a few of these necessary skills.

1. The first and most important skill is being able to recognize what data should be gathered in the analysis.
2. The second is how to perform the database searches that are necessary to gather all of the meaningful information.
3. The third step is assembling that information on a spreadsheet for analysis.

The appropriate data to gather is any property that was exposed to the market (listing, pending, expired, withdrawn, sold etc.) that potential purchasers of the subject property would deem competitive to the subject property. Appraisers typically think of pertinent data (comps) in the forms of closed sales and active listings. However, would a property that is very similar to the subject that was actively listed on the market at $220,000 for over a year and was recently withdrawn by the owners be meaningful information for the appraiser? Of course it would. A MCA that is based on a lot of types of data has some real potential to aid the appraiser in the valuation process. The data-basing term for these different types of comparable properties is a “Record”.

What search parameters should be used when gathering these comparable property records?   This is best answered by considering what the appraiser is going to do with the data. The MCF is basically a trending analysis; but what are we trending? Many appraisers search for comparables by a sales or listing price range; which is an incorrect method. We are not so much interested in how many properties are offered and how long they have been on the market in a specific price range. The appraiser is not trying to trend a price, he/she is trying to trend a specific property type in a specific location by price over time.

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Sneak Peak - 1004MC 2009 Form - Fannie changes list/sale to sale/list ratio

Original Form - 2008 - Median List-to-Sale Price Ratio

 

New Form - 2009 - Median Sale Price as % of List Price & Dropped "Historical (4-6 & 7-12 month) Analysis for Listings

    

So exactly what did they change?

The first change was to gray out several areas on the form. These areas pertain to historic listing data, (prior 4 to 6 months and prior 7 to 12 months), and the overall trend rating boxes. Fannie Mae understands that this type of info may be difficult to acquire in some areas. However if you can get the data you must still include it on the form and check the appropriate trend rating box.

Fannie's new instructions on the form now state:

“It is recognized that not all data sources will be able provide data for the shaded areas below, if it is available, however, the appraiser must include the data in the analysis.”

Also, the form now requires median sales price as % of list price instead of the median list to sales price ratio.

  Click Here to Download the "Official" Fannie Mae 1004 MC

1004MC TOTAL SOLUTION© IS coming!

[Editor's Note - David Braun, MAI, SRA has been working on the development of a new Market Conditions Analysis (MCA) form that runs in Excel and will be available from http://www.ScoopGear.com ]

UPDATE ON THE 1004MC TOTAL SOLUTION©

As this project is nearing completion, I want to provide an update and some information on this project. Those of you who have purchased and use the USL Documenter II and the Regression Plus for Real estate Professionals programs know that AVT strives for excellence. The success of these products goes beyond good programming to being timely to the appraiser. The foremost consideration in any project that AVT takes on is the resulting effectiveness, but more importantly it efficiency (simple & quick). These are the same parameters governing the 1004MC Total Solution© (Solution) project.

Can an appraiser meet the following three goals; better, faster, and cheaper? This is hard to do unless the work is highly automated. After all, automation can reduce errors and do the work faster. Faster means cheaper because cheaper is really the dollar per hour ratio that the appraiser is receiving.

Let’s talk about a couple of things that the Solution does to help the appraiser. First, it breaks the analysis into eight equal time periods over two years. Because of automation it takes no longer to trend eight periods than it does to trend the three periods on the 1004MC. See the sample below which depicts a portion of the appraiser’s worksheet.

The trend is reported for both, the first and the second year. Second, the computer automatically sets the trend as either “stable, increasing, or declining”, however, the appraiser can over-ride it. The worksheet information is automatically transferred to the official 1004mc form. However, this form would be omitted from a report where the secondary market is not involved and the worksheet would be included in the appraisal report.

This program will be quick, but being correct is also necessary. Let’s discuss how some appraisers may inadvertently use “bad” data in the analysis. The “Total Number of Comparable Active Listings” is a good example of how things could go wrong. First, many appraisers may state that the data is not available from their MLS system as they cannot search for past “active listings”. However, the MLS lists the number of days on market and the days on market for each listing. Therefore, a computer program can count the number of listings that were active for the time periods in question. It is my belief that many automated systems will go this far, but will still get the wrong answer.

Let’s consider an example. Over a 90 day period there were seven listings. However, two of them were actively listed over the entire 90 days, two were listed for 45 days during the period, and three were listed for 30 days each. On average, there were only four active listings during the period at any one time. Many automated systems will report that there were seven listings during the period, and there were; but this would not be the correct information needed to accurately calculate the “Months of Housing Supply”. The result would be to make the market conditions seem worse than they really are.

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First Impressions of the 1004MC: Part 5 - "Closing Thoughts"

Having completed several "1004MC Workshops", read numerous forum posts and talked to many appraisers, one thing is clear, confusion reigns! Most do not see the merits of the 1004MC. They see the problems, including opposing opinions, various interpretations, and few immediate solutions given the limitations of their MLS data services.

At question is not the concept, but rather the execution. While many believe this to be a step in the right direction of mandating a standard for measuring trends, the format is a "time-consuming problem" versus a "problem solving solution". The unintended consequences over-shadow any potential benefit.

The 1004MC is not about medians, totals, percentages, and ratios, no more than it is about the neighborhood. The form is about "the collateral" and "the trends related to the collateral". While market conditions and neighborhood trends are important, the trends of properties similar to the subject are critical.

Lenders are not making a loan to the market area or the neighborhood; they are making a loan on the subject property, the collateral. As goes the trend for properties similar to the subject, as goes the value of the collateral securing their loan.

Highs and lows

The 1004MC gets an "A" for effort and the focus on the subject verses the neighborhood, "C" for layout and "F" for format and function. I understand the need to "standardize trend analysis", however, the format is such that the numbers may mislead more than "make transparent".

It does get a high mark for two factors, first for attempting to replace opinion with statistical fact, limiting subjectivity and secondly, it requires the analysis to focus on "competitive to the subject from the buyer's perspective", removing the influence of lesser or better properties in the neighborhood that do not compete with the subject.

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Freeware - 1004MC Form in Excel - Available for download

George Hatch has developed a build of the 1004MC form in Excel that he's making available for download to anyone who wants to use it.  Download 1004MC   He figured, in these tough economic times, there might be a few appraisers that could use a tool like this in lieu of spending money to update or change their appraisal software.

George says, "This is a pretty basic version, but I have built the math functions into the grids. Several people have already downloaded it and worked with it a little and so far everything looks to be functional"

There are a couple appraisers who have already figured out how to export data dumps from their MLS systems and how to use the spreadsheet functions in Excel to automatically sort and analyze the data and populate the grid in the form.

If George can get ahold of one of those setups or otherwise figure how to do it himself, he'll be updating this form at some point in the future. Hopefully a little automation will eventually smooth the way for those people who choose to take advantage of it.

The download is a freebie, and is available at the email address listed at the top of the attached pdf. http://box.net/shared/3nx558czgn or Download 1004MC   Click here for a pdf preview: Download 1004MC

Now for the legal stuff:

Note: Password to unprotect the form portion of this page is "123"

This Excel file was built as a freeware application, but the user assumes all responsibility for content and use. Please check the contents of the form itself and the functionality of this Excel file before you use it.

Fannie/Freddie do not allow modifications to content of the form itself. Users of this Excel file are welcome to otherwise modify it to suit their own needs, but if/when you do, please don't attribute the modified version to me.

Version date is 01/14/2009; if you find errors or suggested modifications, please send them to me at ghatch760@gmail.com

Click on COMMENTS for additional information!

First Impressions of the Fannie Mae 1004MC Marketing Conditions Addendum: Part 3 - "Medians & Misleading"

In parts one and two of "First Impressions of the 1004MC", we identified the challenges presented by the new form. While its purpose is "to provide the lender/client with a clear and accurate understanding of the market trends and conditions prevalent in the subject neighborhood", the "unintended consequences" may (in all likelihood), provide the opposite.

From my perspective, the 1004MC perpetuates a long tradition of two flawed premises in FIRREA (The Financial Institutions Reform Recovery and Enforcement Act); "all appraisers (by virtue of being state licensed) are qualified to appraise" and "the secondary market (by virtue of its policymaking authority) understands USPAP and the appraisal process".

From Fannie and Freddie's perspective, they want consistent application of underwriting and risk management criteria. If appraisers report the same types of information, presumably you get consistency, which is the foundation of risk management. Eliminating "subjectivity" promotes reliability, a step in the right direction. 

As I am developing a seminar and an automated solution to the 1004MC for appraisers, over the past several weeks I have been working through the form to "fill in the blanks", analyze the results and better understand what Fannie and Freddie hope to achieve with the form.

On the surface, the questions are "mere mathematics", medians and counts, products and percentages, along with the trends they foretell. However in practice, the math and the trends are neither simple nor clear. In fact, when examined from a broader perspective they can be "misleading" in terms of how they are calculated, applied and their indications of change and neighborhood trends.

"Competitive to the subject vs The Neighborhood"

How you define "competitive to the subject" will determine the "calculated results" and therefore the "overall trends". In the same dataset, a broad definition could indicate very different trends from a narrow one. How the appraiser determines "the criteria that would be used by a prospective buyer of the subject property", is the key.

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OFHEO: U.S. Monthly House Price Index Estimates 0.6% Price Decline From June to July

Full Release at:

http://www.ofheo.gov/newsroom.aspx?ID=466&q1=1&q2=None

ASFMRA & LandsOfAmerica.com Team Up - Central comparable sales program for rural properties

The American Society of Farm Managers and Rural Appraisers (ASFMRA), the premier organization for rural consulting services announced today a partnership with LandsOfAmerica.com, LLC (LOA), the nation's leading rural land listing service. Together the two leaders in the industry will provide comprehensive services to members.

The ASFMRA and LOA partnership will provide a central comparable sales program for rural properties to ASFMRA members as well as listing opportunities. The program will benefit not only members and rural real estate professionals but also the buying public by providing and promoting the vast database of rural land properties for sale on the LandsOfAmerica.com website.

Jake Massengale, CEO of LOA says, "It is a big undertaking and a long term program, but with the reach that both of our groups have within the rural real estate market, we think it is a goal that can be accomplished."

LOA provides listing services for rural properties including farms, ranches, timberland, mountain, and waterfront real estate on their network of over 250 rural real estate websites. Members of LOA can utilize this beneficial new program to share information about properties they are involved with selling. As a result, they are able to search the entire program for comparable sales through their main website at  http://www.LandsofAmerica.com

The ASFMRA provides members with management, valuation and consulting services to the agricultural and rural property community with their immense network of professionals. "We are pleased to have this great new partnership with LandsOfAmerica.com. This has proven to be a great new tool in the tool box for managing, valuing and selling rural property," says Merrill E. Swanson, ARA, District VP, serving on the Executive Council for ASFMRA, "I have found that LandsOfAmerica.com is a very cost effective and successful advertising medium to expose rural land listings to a wide variety of prospects. The ability to advertise listings not only on LandsOfTexas, as in my case, but on all of the associated websites provides very good exposure on a national basis. The knowledge of these listings on LandsOfAmerica.com provides appraisers a head start for confirming comparable sales. The new comparable sales data system being developed by LandsOfAmerica.com should greatly aid Appraisers, Managers and Brokers in the American Society."

With the ASFMRA and LOA teaming up to provide these services to their membership base, it increases the exposure of rural properties nationwide and provides valuable tools for sharing information and valuing properties. This information is intended to be a starting place and used in a general way. Members are cautioned to always verify the integrity of the information by a professional.

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Webcast - Market Conditions Analysis - Part 3: What is a "Market Bubble"?

Webcast Author: David A. Braun, MAI, SRA (President, Braun & Associates, Inc.) has been actively engaged in real estate appraisal, review, and consulting since 1976. David is also the author of Appraising in the New Millennium - Due Diligence & Scope of Work, 3rd Ed.

David Braun, MAI, SRA has been working with the a la mode, inc.'s Labs Project on the development of a new Market Conditions Analysis (MCA) form that runs in Excel.

This webcast is the third in a three-part series that will be discussing:

• Why do appraiser's need to do a Market Analysis? (Part 1)
• What is a Market? (Part 2)
• What is a Bubble in the housing market? (Part 3)
• What are some methods of performing a market analysis?

In this third webcast David talks about what defines a "Market Bubble" in his down-home Tennessee style.  Here's an excerpt:

"Now the best way that I can describe what happens is by telling you a story about when I was young. We used to have these little balsa wood gliders that we would throw. And, you could set the wings up and back.  And, depending on how you set the wings on those, they could go up . . .or they could go down."

"Occasionally, we'd set the wings so far to one side that when we threw it, it would go up, and then it would stall  . . . and down it would come!  "

"So that's what I think about.   As soon as the activity slows down. . . as soon as that "plane" that's going up slows down, the nose goes up and BOOM!  Right down on its tail!  An that's what a lot of "Investors" have done now." 

Webcast Author: David A. Braun, MAI, SRA (President, Braun & Associates, Inc.) has been actively engaged in real estate appraisal, review, and consulting since 1976. David is also the author of Appraising in the New Millennium - Due Diligence & Scope of Work, 3rd Ed.