The following has been reprinted with permission from the Oregon Appraiser Certification and Licensure Board — Spring 2008 Edition - Declining Market Designations and Market Forecast Analysis by Larry Green
To the surprise of many appraisers in the Portland-Vancouver Beaverton-Oregon-Washington Metropolitan Statistical Area (MSA), Fannie Mae, Freddie Mac and several major lender guarantors identify this MSA, as a “declining market.”
This MSA consists of Multnomah, Washington, Clackamas, Columbia and Yamhill counties in Oregon, as well as Clark and Skamania counties in Washington. The declining market designation applies to several other regions in Oregon, such as Douglas, Jackson, and Deschutes counties.
Newspaper headlines such as “Declining Market Designation Stumps Experts” have been published in several areas around the nation. More and more appraisers are now being asked or required to report market condition as “Declining,” and they feel pressured by their lender/clients and/or appraisal management company (AMC) clients to comply.
Well, let me help to explain the current situation by looking at how Fannie Mae, Freddie Mac, and guarantor mortgage insurance companies gather their data and identify “declining markets.”
First, Fannie Mae and Freddie Mac (Government Sponsored Enterprises – GSEs) rely on data gathered by the Office of Federal Housing Enterprise Oversight (OFHEO), http://www.ofheo.gov. OFHEO publishes quarterly rankings by MSAs based on House Price Index (HPI). The HPI is a broad measure of the movement of single-family house prices on the national, state, and MSA level.
The HPI is a weighted, repeat-sales index, meaning that it measures average price changes in repeat sales and refinancings on the same properties. This information is obtained by reviewing repeat mortgage transactions on single-family properties whose mortgages have been purchased or securitized by GSEs since January 1975.
With the release of the fourth quarter HPI, OFHEO made modifications to the way its national HPIs are computed. Most important to appraisers is the separation of the sale-resale purchase-only index from the all-transaction index, which included GSEs refinance transactions of the same property. For a greater understanding of OFHEOs methodology, you should spend some time at their website.
Now let’s get back to the “declining” designation. The GSEs identify a declining market when two quarterly statistics decline in the rate of appreciation, not just in a calendar quarter. This method has some good reliability because it provides higher confidence that the data extracted is sufficient to support a valid trend.
The point is, a market area may indicate appreciation, but the rate of appreciation is declining when measured by quarter over quarter trends. According to FreddieMac, market declines exceeding one-percent for the most recent two calendar quarters represent a declining market, or when year-over-year statistics indicate overall market declines in the MSA. The exception is when an increase is shown in the two most recent calendar quarters. FannieMae simply states, “a declining market is one in which home prices are currently declining.”
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For example, although Portland’s MSA shows a fourth quarter 2007 (4Q07) appreciation of 0.30%, the third quarter (3Q07) appreciation is 0.71%. By applying the GSE’s criteria for measuring market trends by calendar quarter over quarter, the calculation indicates the market declined 57.75%. From 2Q07 to 3Q07, again the change from the prior quarter 2007 declined 54.78%.
On an annual basis, Portland’s MSA shows 2007 appreciation of 4.24% while 2006 annual appreciation was 13.45%. By applying the GSE’s criteria for easuring market trends by calendar year-over-year, the calculation indicates the market declined 68.48%. Standard & Poor’s/Case-Schiller® monthly home price indices for 20 metropolitan areas includes the Portland MSA. According to S&P’s index, the Portland MSA peaked July 2007 at 186.51 and declined each month to January 2008 to 178.81. The most significant decline is from December 2007 to January 2008 indicating a 2.01% drop.
The frustration with many Portland MSA appraisers is they point to Residential Multiple Listing Service (RMLS) and National Association of Realtor (NAR) http://www.realtor.org/Research.nsf/Pages/MetroPrice data, which indicate appreciation trends. NAR reports the median sales price of an existing single-family home in Portland’s MSA as $290,500 for the fourth quarter 2007. This is up 1.8% above the fourth quarter median sales price of $285,400 in 2006. On an annual basis, the 2007 median sales price of $295,200 is 5.13% above the 2006 median sales price of $280,800.
It paints a different picture when you look at the last two quarters of 2007. Third quarter 2007 median sale price of existing homes peaked at $299,700 and fell to $290,500 in the fourth quarter, experiencing a 3.07% decline. The median sale prices were not seasonally adjusted. All these web sites are available free to appraisers and should be included in the “appraiser’s toolbox” for market trend analysis.
Secondly, the GSEs consider market watch research by several major lender guarantors. To name a few, AIG United Guaranty - https://www.ugcorp.com/decliningmarkets.html, Genworth Financial Inc. - http://www.gemortgageinsurance.com/ , and Republic Mortgage – http://www.rmic.com/Pages/default.aspx. Each of these reports the Portland MSA as a declining market.
Fannie Mae Announcement 07-11 addresses Collateral Valuation Practices and Declining Markets (07/13/07). The announcement advised all lenders of a new message in Desktop Underwriter® (DU®). This message will be generated when it appears that a property is located within a declining market (as defined by the GSEs).
In these instances, DU will provide a message back to the submitting lender:
The subject property has been identified as being located in either an area of declining home prices or in an area where it may be difficult to assess home values. The lender should carefully review the appraisal to ensure that the appraiser has appropriately analyzed property value trends and overall market condition to arrive at the value provided. The lender should request additional support from the appraiser if it determines that the appraisal does not accurately reflect current market conditions (e.g. the declining property values field is not checked when market conditions suggest otherwise.) {Emphasis Added} Please refer to our Property and Appraisal Guidelines in Part XI of the Selling Guide.
Since most loan originations are submitted to the secondary mortgage market for securitization, the submissions must meet the GSE’s guidelines.
The bottom line is if you feel pressure from your lender/clients or AMC clients, it is not from them, but originates with the GSEs!
So when your client asks or requires the “declining” market condition be reported, or the appraisal report will be rejected, here are some suggestions:
- Be sure to develop your opinion of market trends by employing recognized techniques for identifying supply and demand.
- Appraisers may check the declining box based upon the GSE’s designation of a declining market.
- Explain the distinction of the GSE’s criteria for designation of a declining market, while data exists indicating stable or appreciating trends.
In Part II of Declining Market Designations and Market Forecast Analysis Larry Green will discuss several tools that are available to analyze market trends. These include:
- The methodology to calculate the absorption rate
- Days on Market (DOM),
- List to Sale Price ratio (%SP:LP),
- Sale-Resale of the same property,
- Real Estate Owned (REO) activity
Author: Larry R. Green, Appraiser Compliance Analyst, Oregon Appraiser Certification and Licensure Board, 3000 Market Street NE, Ste. 541, Salem, Oregon, 97301. Tel. 503.485.2555 eMail: [email protected] - http://oregonaclb.org/media/Spring2008Newsletter.pdf
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