AUTHOR: Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors, 936 San Jacinto St., Redlands, CA 92373, Real Estate Appraisals, Consulting, Expert Testimony, Forensic Reviews, Fraud Research and Analysis, Litigation Support, Fraud Training 909-798-8855, fax: 909-798-0139
In January of this year, Blanche Evans, editor of Realty Times, published a book entitled "Booms, Bubbles and Busts" which I purchased and read and challenged her about. Her article talks about the concept of a Rolling Boom. In that concept, recessions were dismissed, instead what happens is the boom simply rolls along to some other part of the county.
In the majority of the Metro Markets in the U.S. today, housing prices are measurably declining, even though they are being propped up by the stilts of concessions and cash back deals. Deduct 5% to 20% and in net terms (net to the Seller) they are going down.
The Case/Shiller graph of the U.S. Housing Market shows a downturn since the first Quarter of 2007 and continuing. Projections are now floating that it may be 2011 before we know we are out of the woods. Standard & Poor's - S&P/Case-Shiller® Home Price Indices
Those areas that lagged way behind, that never experienced the 30-50% price increases per year, may still be going up. For example, Rock, WI, where prices are still going up and where a single-family home can be purchased for less than $100/SF.
Some fundamental elements of what creates housing value, that may not be taught in pre-licensing or continuing education courses, are household incomes, market segmentation and population growth.
As housing markets across the country have gone from hot to cold, many appraisers are coming up with higher appraised values than the sales price of their subjects.
If the appraiser has not analyzed the market and verified their data, the adjustments made could be wrong and result in a misleading report. Not on purpose, just out of a lack of knowledge or understanding.
This could lead to liabilities, civil for sure, criminal . . . probably not. The element of intent needs to be proven before fraud charges are brought. One might not intentionally mislead, but could do so out of a lack of research, knowledge or understanding about the Housing Market.
Market Segmentation:
In every market area, there are different segments of the housing stock and of the buyers for each. While the supply side of the market may have come to a halt in many areas, with construction of new tracts of homes and condo's ceasing, there is a certain inventory level which can be analyzed by segments.
Knowing the overall inventory of a given market and knowing that of each segments, is a good thing for the Licensed Professional Appraiser. This is especially true when they are providing information for the reliance of others, upon which financial decisions will be made.
In urban markets where there is an MLS system, the appraiser can check the inventory levels by comparing the current inventory to the number of sales in the past month, and by the average number of sales per month YTD. Dividing the big number by the little one, will result in the number of months worth of inventory.
This can be done by segments as is applicable to the current appraisal assignment. Locational elements are often used to identify segments. Buyers often look within a particular school district, or identifiable neighborhood. Knowing the different segments of any given market is a good thing.
Price points are segmented too. In my town, there is a different set of statistics above the $750,000 price level than below. For the Residential Appraiser, the $1,000,000 market might be a place to cut off and watch activity differences above and below the line.
Segmentation notwithstanding, the overall condition of any given Market Area or Sub Market is a good thing to know.
Following are some MLS Statistics and Inventory, Listing and Sales information to consider as an example of one Sub Market within a larger Region:
| New Listings | 26 |
| ||||
| Back on Market | 1 |
| ||||
| Price Increases | 1 |
| ||||
| Price Reductions | 31 |
| ||||
| Contingents | 2 |
| ||||
| Pendings | 9 |
| ||||
| Solds | 6 |
| ||||
| Expireds | 16 |
| ||||
| Inactives | 5 |
| ||||
This is a daily view of one MLS. It is apparent that there are more Listings and Price Reductions than Sales by a wide margin. When the ratio of listings to sales is inverted, Inventory is building up. In this particular market, that has been the case since 2005.
Inventory buildup leads to an over-supply. In the 9/6/06 article on point, I defined what I had observed from the past as a balance, over-supplied and under-supplied market conditions. Taking a look at the above MLS Statistics from the Desert Area MLS, lets consider the Current Inventory and Current or Year to Date Sales.
- Listings: 8,639
- Sold in Last Month: 363
- Average Monthly Sales YTD: 587
What do these numbers mean? Based on the last Month, there are 23.8 months worth of inventory. This is just what is in the MLS, not counting all the REO's that lenders are selling direct or via auctions. By any objective standard, this is an over-supplied Market. That which seemed outlandish to some last September, may have new meaning today in terms of Supply and Demand issues.
Using the Average Monthly Sales numbers, there would only be a 14,8 month supply. But the market was better back at the beginning of the year. In fact, the peak in this market is during the winter months, just the opposite of most markets. The YTD average number of sales divided into the inventory, will provide a misleading indication of supply conditions.
In the recent past, there was a huge influx of buyers from all over that were coming to this market including 2nd home buyers, speculators, flippers, 1031 Tax exchangers, etc. That flood has now stopped.
Supportable Demand:
On the Demand side, there is a factor that we can all use to find the basis for basic fundamental Supportable Demand in any Market. We can take the Household Income for an Area, and using normal Underwriting ratios and loan ratio's plus an assumed down payment; and calculate it. Here is an example:
- HHI: $55,000
- Loan Constant: $6.00 Per Thousand
- Underwriting Ratio: 32% ($55,000 X 32% = $17,600)
- Supportable Monthly Payment: $1,466
- Supportable Loan Amount: $244,444
- Assumed Down Payment: $100,000
- Supportable Demand Price Level: $344,444
- Current Average Price Level: $450,000
- Percent Over Valued: 23.45% ($450,000 - $344,444 = $105,556 -:- $450,000 = 23.45%)
Each market is different, try this in the markets you work and see where supportable demand calculations fall, in relation to the average housing prices. Interest rates change, so the loan constant will change over time. Right now they are low. If rates go up, the capacity of buyers goes down.
In some Markets, there are not a whole lot of buyers with 20%+ down payments. In others there are more than average numbers with even more than that, in some cases, cash buyers. Each Market will be different.
Knowing what the Supply level is, is a good thing for the License Professional Appraiser. Knowing what Supportable Demand levels are, is good too. Knowing How Much a given Market is Over Valued, is very helpful to the Appraiser being able to report factually accurate Market Conditions, which for many, boils down to two Check Boxes on a Form.
From a liability standpoint, if a Market had been going down when the Appraisal was made, this fact can be verified statistically. If a Market had been going down and an Appraiser marked the Stable box, time will tell whether they have liability to the buyer, lender, investor, mortgage insurer or governmental agency.
Price Indexing is being done by Case/Shiller and used nationally by the secondary mortgage market, and Wall Street. Knowing what the National Housing Markets are doing, as well as the State and Region, is a good thing for the Professional Licensed Appraiser.
Not knowing, and not reporting the truth, can be very bad. It can put one in an indefensible position. Buyers are suing appraisers in larger numbers, they are the fastest growing segment that are doing so. Between the buyers and the lender pipeline, about 80% of the civil suits against appraisers are accounted for.
Supportable Demand and Supply are good things to know and to report to clients too boot. As the National Housing Market heads into a very depressing period these next 2-3 years, those appraisers that can find a way to put their arms around their markets and understand fundamental demand analysis, will float to the top.
The last time the market tanked, the loan losses were blamed on the commercial appraiser, mostly the designated ones. I nave a written record of the Congressional Hearings by the Barnard Committee, entitled The Impact of Faulty and Fraudulent Real Estate Appraisals on Federally Insured Financial Institutions and Agencies of the Federal Government. This time it may be the residential appraisers who are blamed as the bulk of the loan losses so far have been in Residential.
Where did the Rolling Boom go? I think it left the real estate markets in general. Now we are left with supportable demand. Oh, and market segmentation, but that is another story.
AUTHOR: Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors, 936 San Jacinto St., Redlands, CA 92373, Real Estate Appraisals, Consulting, Expert Testimony, Forensic Reviews, Fraud Research and Analysis, Litigation Support, Fraud Training 909-798-8855, fax: 909-798-0139
Recent Comments