How do you spot and judge market trends and news events that might influence your appraisal, or that you should bring to the attention of the client? If you’re in a situation where the value of a property could rise or fall dramatically from its current appraised value, depending on various factors, how can you take the variables into account and provide the most accurate appraisal possible? The short answer is that your appraisal will be applicable to a certain effective date—but you shouldn’t neglect to let the lender know how market forces might affect the appraised value down the road.
“There’s disagreement and debate in the appraisal profession regarding this issue,” admits Dan Bradley, Director of Online Appraisal Curriculum of McKissock. “Every appraisal has an effective date—that is, the date of the valuation. Technically, the appraised value is good for that date, and that date only. For example, if an appraiser completes an appraisal on a property with an effective date of December 20, 2016, and something happens to the property or to the market on December 21 that changes the value of the property, that’s not the appraiser’s responsibility. An appraiser isn’t expected to possess a crystal ball.”
For example, Bradley says, the appraisal profession got somewhat of a black eye during the market crash of 2007-2008 because some clients and users of appraisal services asked, “Why didn’t appraisers tell us that these appreciation rates were not sustainable?” and “Why didn’t we get a warning from appraisers that the bubble was about to burst?” An appraiser is indeed responsible under Uniform Standards of Professional Appraisal Practice (USPAP) for analyzing “economic supply and demand” and “market area trends.” Furthermore, in Bradley’s opinion, an appraiser has an ethical obligation to report to the client any known information or apparent trends that would affect the value of the subject property after the effective date.
“As an example,” says Bradley, “let’s say an appraiser is valuing a residential dwelling for a mortgage refinance transaction. The day before the effective date, the area’s major employer announced they will be laying off 2,000 workers within the next six months. Since this just happened yesterday, the market has yet to react to the news, and there’s not enough information available to allow the appraiser to draw a conclusion as to how this situation will affect the market. It’s likely, though, that this layoff will affect the market, most likely in a negative way. In the appraisal report, the appraiser should provide the known information regarding the situation, and state that the pending layoffs were just announced and there’s insufficient information available for the appraiser to draw a conclusion as to how this will affect the market.”
By making that disclosure to the client, Bradley explains, the appraiser has put the client on notice that this is an ongoing situation and the value of the subject property may change in the near future. However, not all of these situations involve something as dramatic as a layoff announcement. Sometimes, the factors that fuel trends are difficult to spot. That, says Bradley, is why geographic competence is so important in real property appraisals. To stay current and relevant, an appraiser needs to constantly research and analyze the market for trends.
“It isn’t enough for an appraiser to simply say, ‘I have been appraising in this market for 30 years, and I know this market,’” Bradley insists. “Experience is no substitute for current research and analysis. All real property is subject to forces constantly at work that can change property values.”
“I talk about this subject a lot on my radio show,” says Phil Crawford, who hosts the Voice of Appraisal show out of Maineville, Ohio. “An appraiser must know what’s going on with the economy, on a macro level, at all times. All real estate is local but you must become a macro economist in today’s world. ‘Black Swan’ events could occur that could affect the bond market, the 10-year Treasuries, which are extremely important to mortgage rates. If the 30-year mortgage rate were to increase by one percentage point, for example, that could represent a 10 percent decline in home values. Know how the bond market works; watch the stock market; look for impending inflation. Watch out for ‘chalk marks.’”
Crawford points to the credit crunch in the last quarter of 2007 as a classic chalk mark. The market didn’t crash till late 2008, but anyone who was aware of the credit situation at the end of 2007 could have seen the crash coming.
“The chairman of the Federal Reserve admitted that the Fed pumped up the equity market,” Crawford notes. “I considered that a chalk mark, too.”
On the micro level, Crawford advises appraisers to notice if listing activity is showing any decline or increase. But on a local level, he says, your forecast can only be depended on for 120 days at most.
“An employer laying off people might be a big deal, locally,” he says. “A garbage dump coming in, or the selling of a park, could affect properties in an area.
“Real estate finance now is an R-rated movie. We hear talk of the reimplementation of the Glass-Steagall Act, and the destruction of the Dodd-Frank Act. It’s an exciting time to be an economist. The current situation is like a snake eating its own tail. If the equity and the stock markets go up, bond holders will reposition into stocks. If yields go up, it could crash real estate—which could crash the stock market. Appraisers need to be economists, and it’s an exciting time to be one. Banking is sexy, right now—although we have to admit it works better when it’s not.”
Sometimes, says Karen J. Mann, president and chief appraiser of Mann & Associates (Discovery Bay, Calif.), an appraiser has to hang back in the wake of a potentially market-changing event.
“On October 21, 1989, an earthquake affected the whole San Francisco Bay area,” she recalls. “Lenders, appraisers, anyone with anything to do with market values, had to hold still for a week or two, to see what the effect on the market would be, whether the event would create a value differential. Of course it did, at first, but the market picked up after a while.”
What are some ways you stay informed on the changing market trends in the markets you serve? Please share them in the comments below.
About the author
Joseph Dobrian has been writing about commercial and residential real estate, and real estate-related finance, for more than 30 years. His by-line has appeared in The Wall Street Journal, The New York Times, The New Yorker, Real Estate Forum, Journal of Property Management, and many other publications. He is also a noted novelist, essayist, and translator. His website is www.josephdobrian.com, and he can be contacted at email@example.com.