Real Estate Analysis and Commentary.

May 27th, 2015 8:33 AM
I'll never forget the first subdivision appraisal I completed. It was the late 1990's and residential demand in the greater Sacramento, California market was on a serious upswing… one that would last for several years. I was retained to appraise a master planned community for the formation of an underlying Mello Roos bond, including several hundred proposed homes by multiple merchant builders. Stopping by one of the builder's marketing offices, I asked for a price sheet of the builder's units. The agent asked, "Do you want today's sheet or next Mondays?"

"What's the difference between the two?" I asked.

"Well, each month we raise the price for every unit by $5,000. The next update is Monday," she responded.

"Oh?! Are there any other upgrades related to those price changes or are sales just that strong?"

"We can't build fast enough to keep up with demand," she responded. "The only way we can temper demand is to keep increasing the price. I think we may have to start increasing prices every week."

Wow! I was blown away. Fast forward a couple months and sure enough, prices were increasing every week and units were selling just about as fast as they were released. By the time the first phase was closed, the initial buyers had $50,000 - $75,000 equity simply by securing those earliest contracts at initial base prices.

Rapidly changing markets pose a real valuation challenge. As appraisers, we must ensure that we have our finger on the pulse of supply and demand, analyzing emerging trends as housing inventory changes, list/sale price ratios fluctuate, and economies evolve. It's a dynamic practice, but successfully navigating market change is what we appraisers do so well, leveraging our experience, data and local expertise to ensure our conclusions are well founded.

Recently at Clear Capital, we have observed substantial change in several markets nationwide. As an example, as pointed out in our May 2015 Market Report*, several metro markets are experiencing double digit appreciation gains year/year (*example chart below).

When we observe rapid market change, we must ensure we are sufficiently analyzing these trends and accounting for how they impact our valuation conclusions. Support for our adjustments, for instance, should be predicated on observed and supportable trends in our local market data.

Here are a few tips that we recommend for appraising in rapidly changing markets.

  • Place sufficient weight on the date of sale for selecting your comps. In rapidly changing markets, the more recent your sale date, the better. Placing more weight on recency makes sense in such markets.
  • Adjust your comps based on changes in market conditions since the date your sales were negotiated. If your comp closed 2 months ago, but was under contract 3.5 months ago, your adjustment should reflect market changes over the past 3.5 months.
  • Additional consideration can be placed on active listings, pending sales, and reference to recent list/sale price ratios to help support your conclusions. In rapidly changing markets, current activity is super important.

A friend of mine in San Francisco, CA, recently listed his home in the high $500k's range. He told me that he'd hoped he might find a buyer in the $700k's. For most of the country, this strategy sounds irrational… but in San Francisco, CA, it's actually pretty typical. He listed his home on a Friday. On Saturday, he'd received 26 offers, one of which he accepted. A month later, his sale closed escrow… in the low $900k's. I know, crazy, but true!

To aid in your quest, we are employing several new measures to help identify rapidly changing markets. You may find a "soft stop" Pre-Check rule that reveals what our Home Data Index (HDI) is suggesting about your subject market. Feel free to consider HDI data and how it may support your analysis and related adjustments for comparable sale/negotiation dates. If you have questions, please ask us. We're here to help!

Finally, no one knows your market better than you. If you see additional opportunities and strategies for communicating changes in market conditions and related impact to valuation conclusions, please use this forum to share your ideas and thoughts! As iron sharpens iron, one appraiser sharpens another! We'd love to hear from you and build better solutions through this team effort.

Thanks for standing on the front lines in your market, keeping a close eye on trends and ensuring that you properly adjust for changing conditions with support from your market analysis!

Posted in:Valuation and tagged: ValuationChanging Markets
Posted by Wayne Henry on May 27th, 2015 8:33 AMLeave a Comment

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