Appraisers Up for Micro-Macro Data
Truckee, CA-Under fire from the industry, the public opinion and government requirements that keep piling up, appraisers are pressured to gather data and develop a sophisticated understanding of the marketplace so they can survive in the long run.
"It is important to recognize that an appraiser always has to do both a micro- and a macro-market analysis when they perform a valuation," says David DeMello, executive vice president and chief appraiser at Clear Capital here.
Understanding how is key not only to be able to prepare an accurate valuation report but also to comply with newly implemented rules.
A hot topic particularly among residential real estate appraisers is the requirement to report standardized metrics and data, Mr. DeMello says. As of 2009 Fannie Mae began to require what is called a 1004 MC, which is a market condition addendum to all residential property valuation reports. In fact what is now the 1004 MC content has always been required from appraisers. However, now they have to provide data to support their conclusions, he says, whereas previous to 2009 all they had to do was come up with a conclusion about the stability of that market that was largely speculative.
Mr. DeMello, who started working with appraisers in 1998, recalls how before it was assumed the appraiser had done a credible analysis and all the data was contained in the appraiser's work file, so even though it was not presented to the customer, it was completed. "Nowadays you can't get away with that, but actually have to provide the statistical data to support those conclusions. And the HDI report offers a tremendous advantage towards that end to appraisers."
Clear Capital incorporates in its HDI Market Report data based on appraisals and BPO reports performed daily and monthly in addition to the information retrieved from a national public record database of all closed sales in any specific market. Combined with a sophisticated analysis that data allows appraisers to create a timely, standardized report that helps support their property valuation conclusions.
Plus, Mr. DeMello argues, appraisers need to keep five-year file records to support their valuation assignments and Clear Capital's HDI report is a convenient resource that preserves the data in a verifiable manner.
Whether they are independent or otherwise appraisers can greatly benefit from accessing the HDI report since it is periodically compiled and reported to the media on a monthly, quarterly, semiannual and annual basis. An online edition, available to all, allows Web users to access data, use the same metrics and perform the same analysis independently on any area or single property by simply logging in an address and ZIP code.
"It follows those same metrics that you are used to seeing when we go to the market on a national scale," Mr. DeMello said. "So for an appraiser doing a report on 123 Main St., they are not going to get as much utility out of our macro analysis of the whole nation as they would on their immediate submarket area."
Furthermore, a macro-market analysis helps the rater of an appraisal report better understand how the market at large affects what is going on in one particular community, the executive says.
There are a number of factors that influence a macro-market analysis. For instance, he said, it provides insights through answers to questions such as: Is it a community that has been influenced by the closure of one major employer? Is it a metro area market where such changes are absorbed more easily than in more remote areas? What is the unemployment rate in the area? What is the number of foreclosures? What are county-level migration patterns?
"When you talk about a micro-market area it is important to recognize that those factors influence different communities very differently," Mr. DeMello said.
For example, the most recent Clear Capital Home Data Index Market Report featuring data through Dec. 24, 2009 showed some encouraging results were coming from several micro markets. The Las Vegas metropolitan statistical area drilldown showed its first positive quarterly price gain in over three years at 1.1%, even though yearly price declines in the area remain high at 27.4%. According to Clear Capital, Las Vegas "is showing signs of transitioning from home-price free-fall, to more traditional trends."
Meanwhile the report showed that national quarterly price gains remained positive at 1.7% while year-over-year prices also improved to -1.3% in 2009 compared to -20.4% in 2008. On a quarterly basis all four regions showed gains: at 4.1% in the Midwest, 1.2% in the South and the West, and a modest 0.4% in the Northeast. By yearend the annual national saturation rate of real estate owned properties dropped 16 percentage points to 25.5%.
Clear Capital president Kevin Marshall described these gains as remarkable given that home prices for the nation as a whole were generally flat for 2009 despite a year-long volatility that included record declines early in the year, followed by the gains of summer and fall. Homebuyers with better credit who entered the market to take advantage of the lower interest rates helped increase home sales. At the same time, according to Clear Capital, the Home Affordable Modification Program and other modification options available "helped regulate the new supply of distressed properties."
One example of how different communities are influenced by major economic developments, Mr. DeMello says, is the area surrounding Lake Tahoe in California where some neighborhoods could be called "economic driven," meaning changes in interest rates and employment are going to immediately impact the values in most communities.
Similarly, in some other areas such as properties located just a couple of feet from the lake front, which are worth millions of dollars, they are not nearly as influenced by changes in economic stability.
"These homeowners are simply not affected as granularly as the rest of the market. So recognizing what macro market your subject property is located is really important," Mr. DeMello says. "And that's not always defined by geography. Sometimes it's the architectural style, sometimes it is located within a historic district, and it's only those historic properties that you need to be considering as it relates to that macro-market analysis for your subject."
The understanding of these implications results in more accurate valuations. If for instance the appraiser only looked at the ZIP code level he or she would find there was a 3% drop in price, but a review of price changes among the truly competitive properties in the area may reveal something completely different, he says, such as a 2% increase within the same timeframe.
"Which is why appraisers need to determine what are the market changes, rather than what are the time changes. Each property is located in its own unique market, because each market is influenced differently by economic factors."