Market Analysis for Real Estate Appraisers – Part 5
This is the final installment of a 5 - part series on Market Analysis for Appraisers. In this process, we’ve looked at the “who, what, when and where” so to conclude, it’s time for “why.”
Housing market analysis is a basic exercise in algebra, plug in the known and solve for the unknown.
In some cases you won't have the knowns (future projections) but you will
have past trends and ratios to guide you. Using them will help you discover one unknown and that unknown becomes a "projected" (or assumed) and serves as the basis to discover the next one.
This is just one of several ways to approach the problem and by no means is this the only technique. Often you will develop a range of indicators from which you will have to correlate a conclusion, a process that as an appraiser, you should be somewhat familiar with. Be prepared to re-visit and revise your numbers (and your thinking) as more concrete information and data becomes available.
Exercising the brain … new thought.
The greatest benefit of market analysis isn’t adding a few pages of charts to your report, but rather the “getting back to basics” aspect of understanding the world we work and live in. When you know your market and what makes it work, you somehow take on a new persona … one that makes you a little more confident and in the long run, your reports have more merit.
The examples we went through only scratch the surface of where you can go. I think the real danger is going to far and over-analyzing the numbers. It’s easy to get too focused on the ratios and the next thing you know one minor tick up or down can look like the signal of doom and gloom. It works a lot like options in a home. Some upgrades can change the value, while others (even though they add cost) have minimal impact. Be sure to see the big picture and not focus on a minor event.
Mirror, mirror on the wall, will the economy zoom or stall?
One last thought. Making forecasts and projections is like original sin … once they are out there, you can’t take them back and the world will hold you accountable … ask Eve about the apple. Unfortunately, USPAP doesn’t hold us harmless from this obligation.
While USPAP doesn’t require you to be an economist, it does require that you justify your analysis and conclusions within the appraisal, such as those for supply and demand, market pricing trends, etc. Including some economic analysis will at the very least, provide support for your conclusions on the market’s direction.
Market analysis is an ongoing learning experience. Change is a constant and as your city grows or the market changes, you have to discover what new factors are affecting the norms. Doing so is “why” you will stand out with your clients.
Hindsight is 20-20. It costs nothing and only generates cynicism.
On the other hand, foresight places you in the position to be of real service and value to your clients. As appraisers, our task is not to tell the client what they want to hear, but rather what they need to know to make good business decisions. While that may sound simple enough, often it isn’t an easy task at all.
A few years back when the market was booming, how many appraisals fell short of the mark, only to be proven wrong a month or so later as closed sales clearly supported a higher range of value for that same property. Likewise, in a market like many are experiencing today, is the prospect for a steeply declining market (as foretold by the media) or is the demand side settling back in to a pre-2003-2005 level? And if so, how does demand today compare to population or employment?
Unless we do our “homework,” how will we know who is right about the economy, what may be impacting the market, when changes happen, where we may go next and why the market is headed in that direction. Until we do, our clients won’t know either. Surprisingly, you may discover that the
“media buzz” generally isn’t always on target. In the words of Mark Twain, “gather all the facts first, then distort them as you like.” Twain was speaking on the media and statistics. It was as true then as it is now.
Primary research leads to innovative thought and on to original conclusions. It generates a new perspective and leads to a better understanding of the marketplace, for you and for your clients. Who knows what you might discover and when it may have a positive impact on why you chose to become and appraiser and where such discoveries may lead you.
Market Analysis … how original!
“Think of it as exercise for the brain,” something that according to the reports I’ve seen and read lately … we’re not getting enough of ... and 1 and 2 and 3 ... use those thoughts ... 4 and 5 and 6 .... feel the burn ....
Prior Posts
- Part 1: Looking Back to the Future …
- Part 2: Cause and Effect – Trends & Relationships
- Part 3: Multipliers – Economic Development & Diversification
- Part 4: Housing Demand
AUTHOR: Patrick Egger, Stewart Title of Nevada, is a Certified General Appraiser and the creator of several Real Estate CE Classes including "DeMystifying the Appraisal - Appraisal Techniques for Real Estate Agents" and “Understanding the Las Vegas Marketplace” … Market Analysis for Real Estate Professionals” from which this article was excerpted. He also has his own blog - Intouch. Contact: lvreqa@cox.net
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