Appraisals in Declining and Recovering Markets

When a motivated buyer and a motivated seller agree to a price that is value. While commonly stated in the real estate industry it is not always true. It is not true even when there are multiple offers at or above the sale price. It has always been a challenge for appraisers to identify value and support their opinions of market trends where neighborhood prices are in a state of flux. Today, this challenge is more widespread than perhaps any other time in history as neighborhoods and markets that were previously declining are now stable if not recovering.

It is when the market “bounces” that there are difficulties. For an appraiser, knowing when a time (or market condition) adjustments should be made and having the paired sales to support “market condition” adjustments can be difficult if not impossible as sales data often does not yet exist.

Scope of Work is Critical

Present scope of work by the vast majority of lenders/underwriters allows for sales to be used up to 12 months previous, in a declining market, 90 day sales are necessary. When a market is declining, the use of past sales can tend to reflect a value higher than what present conditions would dictate. The reverse is true of an increasing market. The adjustment for “market conditions” or “time” is meant to account for these differences.

Clients can stipulate conditions in the appraisal development which can influence the appraisal conclusion. This means lenders may instruct an appraiser to include or exclude certain data such as short sales or other distressed sales as comparables. However, the Appraisal Foundation warns that when a “client stipulates the inclusion or not of a particular type of comparable, the appraiser may have to revisit, with the client, the type of value developed”[1]. This will help ensure that a misleading analysis or assignment result is not reported.

Establishing a Trend – Statistical Tools for Analysis

For the appraiser, identifying and proving a trend rather than just one sale is what is necessary for the appraisal to be accepted. The reality is the sales that take place from an increasing market become comparable sales and in turn should begin to show higher appraised values. Unfortunately it takes time to develop a trend – spotting a trend and proving it are very different things.

Identifying trends may be helped with technology. Recent publications have noted that appraisers increasingly have access to automated valuation models (AVM) or Computer Assisted Mass-Appraisal (CAMA) models. This technology can allow appraisers to access and develop their own statistical tools to support opinions about market trends. The National Association of REALTORS® offers REALTORS® Property Resource (RPR) as a member benefit. RPR recently unveiled tools specific to appraisers.

Limitations of Forms

In a changing “market” (however it is defined geographically), the key to making the case for the potential impact of changing conditions is the conclusions presented in the Market Conditions (MC) Addendum form. Other types of valuations products are likewise evolving along the lines of seeking a neighborhood commentary component to present a much more compelling view than can be suggested through the presentation of recent sales and competitive listings in the body of the appraisal – creating more space in the narrative for factors like the impact of changing investor/owner-occupier mix, agency sales, REO and short sale composition, and predictive factors like the local unemployment rate projection.

Anecdotally, the clearest illustration of this was a recent encounter with leaders from NAR’s Valuation Committee, in which RPR shared a proposed implementation of using the site to autopopulate the MC form. The initial approach was to do it “by the book” and stick to populating the fields that are provided in the form. According to Committee members, overall implementation RPR was proposing – the possibility of extracting different types of analytics from the RPR site to create all kinds of appendices to the MC with a strong visual aspect that they believed would be really helpful to “making the case.” What this pointed out is just how limiting the forms really are in terms of providing a format that supports the use of factual information about overall market dynamics and how that is likely to impact any given subject property beyond what can be expressed through point-level data like comps and adjustments.

Definitions May Impact Value

Clients ask appraisers to indicate if markets are declining, stable, or increasing. Defining a declining market is difficult in large part because there is no single accepted definition in the industry. In some cases the client may define “declining market” but the appraiser may not accept this definition if the definition will produce misleading results.

Defining a market and a neighborhood is a gray area. Some appraisers may define the market and the neighborhood as the same geographic boundaries while others will distinguish between the two. It is possible for a market to be declining while a neighborhood is stable or even improving and vice versa.

[1] APB Valuation Advisory #3: Residential Appraising in a Declining Market. The Appraisal Foundation. May 7, 2012.

  1. Charles Brazil

    Great article. Very insightful for me as a Realtor.