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.
In most of the formerly hot market areas, housing prices have been declining for well over a year. Many appraisers have struggled with how best to provide their clients with an in-depth market analysis, as well as which reference sources should be consulted to provide that analysis.
In the spring of 2006, my office began to measure market declines by Zip Codes or Market Segments and started illustrating the declining trends with graphs in our reports. By the winter of 2006, in some local markets, my office measured double digit price declines.
Now, in the spring of 2008, some areas have declined over 50% in value from the peak. Now we have begun to measure the bottom of the market and to project future value trends, such as when values may begin to stabilize.
The following is an example of how we estimated future values for the city of Corona, which is on the western edge of the Inland Empire, our primary region. Corona borders the city of Orange, where home prices are higher, and the cities of Riverside and Lake Elsinore, where the prices are lower.
From http://www.realtor.com/ - Corona is a city in Riverside County, California, United States. As of the 2000 census, the city had a total population of 124,966; a 2004 special census put the fast-growing city's population at 144,274. The city of Norco lies to the northeast, Chino Hills and Yorba Linda to the west, and the Cleveland National Forest to the southwest; unincorporated areas of Riverside County line all of its . . .
As shown on the map, there is a wide range in pricing in the City with some neighborhoods in the $300,000 range and some over $1,000,000. Not all that different from many cities in terms of the breadth of the range. Higher prices than some, lower than others.
How about taking the Median Income and Median Housing price, and then estimating the future based on normal underwriting ratio’s and a fixed rate loan, using a 20% down Payment?
Where do you find that information? There are many on-line data sources to choose from, and what they list may differ, which is OK for a sample exercise. You should choose the sources in your area that you think are the most accurate or reliable. The following examples are just suggestions.
www.Zilpy.com is a web site that has some demographic information, we also use it to obtain information on Vacancy Rates by Census Block, as well as Rental trends, monthly rental affordability. This information shows that the majority of the Census Blocks have declining rents, with 8 blocks decreasing and 5 increasing. Why do rentals go down in price? We think it is competition from rental houses. Is the same happening in your markets?
http://Zillow.com has been castigated by the appraisal world ever since it started. Most felt it was always low or inaccurate, when values were increasing. I found that most of the time they had bracketed the value, even on my own home. Now that the prices have started down, how accurate are they in your area? In this example they show a drop from $535k to $414k in one year or -22.6%. How does that compare with your analyses?
http://DQNews.com showed a -7.33% drop in value for the year of 2007, small by regional average, which was minus -29.7% according to www.CAR.org.for the year ending March 2008. DQNews reported Corona Zip codes declining between 22.8% and 36.5%, indicating that there has been a huge downward price trend so far this year. An accelerating Depreciation Rate.
When a market starts going up, it does so slowly and increases over time, fueled by currents driving the economics. In the recent run up of 2005 and 2006, easy credit and inflated appraisals allowed some markets to exceed 50% in one year. Now that credit has been tightened, those very same markets are decreasing at an increasing rate. Unemployment is increasing in many areas, wages are decreasing.
If a market drops from an annualized rate of -7.33% in a year, to -30%, measured three months later, the rate of change is certainly increasing at a torrid rate. Assuming this to be true, if, as of March, a monthly rate was -2.49% and, we know that the rate is increasing, what was April 2008? (Hint: More is the right answer.)
We cannot stop a market from going up or down. Appraisers are meant to simply research, analyze, measure and report what the markets are doing. Appraisers claim to have done this every time they check the box on the front of form reports.
What if there were no sales in April, how do we measure how much of a decrease occurred? I believe that no sales means prices are going down faster than the previously measurable rate.
I’d sure hate to do a report relying on old DQ data in a market that was dynamically going up or down. With no sales, we could look at listing prices. According to Zillow.com, in this city, the Listings went down -3.7% in the last month. A decrease of 3.7% is higher than -2.49%. Which number should be used to project a future value 60 or 90 days out? How about using both?
Now that liberal credit has been reigned in, and people actually have to qualify and have a 20% down payment, we can estimate the size of a loan that can be supported in any area where we know the income levels.
I developed the following exercise to teach appraisers how to use a spreadsheet program and graphically illustrate what the Market has done, and project what it is likely to do. Try it out in your local areas and see if it makes sense for you. It helped to put things into perspective for me.
We can substitute the -2.5% Per Month Change Rate {Time} with -3% or -3.7% and get a different number of months to the bottom, where prices should stabilize. The higher the rate of change, the sooner the bottom is reached.
Obviously, in areas that are barely going down, the bottom is further out. When we graph the Future Value Trend, where the line extends beyond the last sale, we can demonstrate 1, 2 or 3 lines at differing angles. I call this part the Angle of the Dangle, and though funny sounding, this is the key to creating demand for our services. Those who can correctly project the Angle may find new sources of business. Many of our clients are now asking us to project the future for a 60-day or 90-day value.
Take this and play with it, attack it, prove it wrong, or prove to yourself that it is yet another wonderful tool that you can put into your bag of skills.
Then, start sharing your ability to estimate the future with your clients. Who knows how you might find to use this. But, don’t give it away for free, few appraisers know how to do this, there is essentially no competition, these skills can be charged for. How much would you charge for this type of knowledge and ability?
In the fall of 2006, George Dell, MAI, SRA, and I began teaching other appraisers how to use statistics and graphing for market analysis. George has now developed a 1-day, 2-day, and a 4-day “Stats & Graphs” seminar, which have become one of the hottest topics the area of appraisal education. If you need someone in the field who can accurately measure a market, consider hiring a graduate of his Stats & Graphs II course (equals four days of training). If you are interested in sponsoring the seminars in your local region, contact George.
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
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