In part 6, we continued the construction of the housing market addendum by developing an economic indicator matrix. Next we need to provide observations and clarify the trends. - Patrick Egger
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Observations make a difference
The economic indicator matrix provides the reader with a regional of trends for key housing related data. While some readers may draw their own conclusions from the data, including several brief paragraphs with your observations and conclusions, sets the stage for the next step down in the "top down" market analysis perspective.
Using the matrix, comment on the trends, key ratios and reinforce the obvious. This will help the reader grasp your logic and keep pace with your analysis. Essentially, you simply want to draw upon the data, restate what the trends are and what's driving the market.
- For example, in Las Vegas we're making national news with record high listings on the MLS and record low sales, bad news that you need to acknowledge and also explain. While the listing volume is high, much of it (estimated 30%) is un-sellable due to speculator held inventory at price points that are far above market.
- Also impacting the market, potential buyers on the sidelines, looking for the market bottom. How do we know this, single family rentals and rents are up significantly over the past several years and so are apartment rents. Something I perhaps should have shown on the matrix example last time and didn't include.
- Core economic indicators (employment, hotel occupancy rates, visitor volume, gaming revenue and taxable sales are performing above past years, indicating a good local economy.
Effectively, the economy is doing well, despite woes in the housing sector market and its important to relate those facts to the reader. Housing demand has shifted from buy to rent, and in-migration, while below historic levels, is still a very positive number. They key here is to reinforce the obvious and provide the reader with some perspective.
Graphing the Indexes
In the picture is worth a 1,000 words category, there's nothing like a graph to make it perfectly clear. FNMA cited use of the Case-Shiller index, OFHEO index and NAR data as reliable sources of market trends. That being the case, use them. Once again, most market areas will be included in one of the indexes. You can provide a graph of market trends for you area and take the opportunity to point out to the reader that such indexes are based on the metropolitan areas and may or may not reflect trends at the neighborhood and or subject property level.
In this way, you have presented data from the sources cited in FNMA's announcement 07-11, yet reserved the right to present supporting or opposing analysis for the "one-unit housing trends" at the neighborhood level in the neighborhood section of the URAR.
The indexes and data for various areas can be found here: Case-Shiller and OFHEO. Case-Shiller covers 20 key metropolitan areas and is updated monthly. The OFHEO includes data for 363 metropolitan areas and updated quarterly.
Supply and Demand Matrix
Developing the second matrix for your housing market analysis is necessary to provide a good picture of past trends for comparison to current trends. You can build the matrix with historical data from your local MLS. Most MLS systems will publish several years of data online or in various reports. The local association will typically keep historical records and generally you can access that data as well.
With the data in a spreadsheet, it's simple to provide the reader with the data and optionally, a simple graph to show the trends on overall market supply and demand. Presenting both the median and average prices over several years will make it easy for the reader to understand the supply and demand situation in the area. As before, including a paragraph or two of your observations keeps the reader in step with your analysis and logic.
Too much time and work, no extra pay?
At this point, we've provided the reader with an overview of the economy, key economic indicators and the trends. We also included either the Case-Shiller, OFHEO or NAR indexes, possibly some graphs, covered trends for supply and demand along with median and average price trends.
While this would seem like a lot of extra work, keep in mind that once you have the data in a chart or spreadsheet format, it can be stored as a template and used repeatedly for various assignments. If you develop you housing market addenda in a word file and incorporate your charts and graphs via object linking and embedding, all you really need to do is periodically update the data, generally monthly or quarterly.
Updating the YTD data in the last column of the economic matrix or supply and demand matrix doesn't take much time or effort and only has to be done once a month or quarter, depending on the data source. Most of the comments for the economy, housing trends, supply and demand, etc. will remain valid unless there's a sudden shift.
Essentially, the first two pages of this 3-page housing market addendum will automatically update as you add new data to the spreadsheet, changing the graphs and updating the data in the matrixes. While the initial set-up may take a little effort, after that the addendum is basically a template that can be updated monthly or quarterly, with minimum time and effort.
While this may seem like extra work (and it is) you are addressing the requirements of FNMA Guidelines and USPAP Standards in a manner that is clear and easily understood.
In the final installment of the Housing Market Addendum, we'll take a look at the neighborhood and subject property.
About the author: Patrick Egger is a Certifed General Appraiser located in Las Vegas, NV. He teaches continuing education classes on the housing market and appraisal issues for real estate agents and appraisers. He can be reached at [email protected]
Other articles in this series:
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