How Real Estate Appraisers look at Market Analysis

October 16, 2022

Woody Fincham, SRA, AI-RRS, ASA, RAA Member of RAC

How Real Estate Appraisers look at Market Analysis

To borrow a phrase from my friend, the real estate market has come to that, “Oh Shift!” time again. Nationally markets are tapering and changing. The Federal Reserve has caused quite the change in the market with the interest rate hikes. The local markets that we service are all experiencing a shift, but it has been an odd shift, unlike any that I have every seen in my two decades in the business. While rates have gone up, much of Central Virginia and the Shenandoah Valley has remained strong when looking at residential single unit demand. Even with the higher rates the shortage of inventory has not allowed prices to start tapering down, yet. Common sense would seem to dictate that downward tapering of values is just a matter of time.

Social media and the mainstream media make a mess of these markets even in the best of times. They do not have the bandwidth to cover local markets, and when you are in a metropolitan statistical area like Charlottesville and Waynesboro/Staunton you get some reporting from the local news but if it is not driven to get online clicks from hyperbole it usually is not worth reporting. National data simply does not apply to the local real estate market and the closest large markets are Richmond and Washington DC. Neither are not great metrics for what our local markets are doing.

I think everyone has heard the old saying, “You can’t see the forest for the trees.” And that is true. We are in the middle of a market transition and exactly how it is transitioning is extremely hard to predict. The best market analysis is always retrospective, as they say, “Hindsight is 20/20.” Until we get past this period over the next few months it may be hard to say definitively what is exactly happening. As an appraiser, it is super important to understand how to gather and analyze relative data.

So, what metrics are worth watching?

  • Inventory levels
  • Absorption rates and marketing times
  • Actual days on market (DOM)
  • Frequency of seller paid concessions
  • Dollar amount of seller paid concessions
  • Sales price to listing price ratios
  • Prevailing interest rates
  • REO and Short Sale Inventory
  • Long term rentals

I compiled some data over the weekend to try and make some sense of how the market is behaving. Marketing time is starting to change. This may just be some seasonality as we have come out of the artificial interest rates of the Covid effect but is still worth noting and watching. Because buying power has diminished due to the interest rates going up it would make sense it is more than just seasonality.

Let us look at one subdivision in particular: Lake Monticello. I chose this one as it is where my wife and I own our home and it is a large subdivision. Data is never in shortage with this location. In this step the home is looked at as a whole and positives and negatives are identified and considered.

The above is a map of the subdivision[1]

Market Analysis

Here we need to identify the market that the subject is located in.  There are three key terms to think of here:

  • Neighborhood
  • Market Area
  • Competitive Market Area

Neighborhood: A group of complementary land uses; a congruous grouping of inhabitants, buildings, or business enterprises[2].

Market Area: The geographic region from which a majority of demand comes and in which the majority of competition is located. Depending on the market, a market area may be further subdivided into components such as primary, secondary, and tertiary market areas, or the competitive market area may be distinguished from the general market area.[3]

Competitive Market Area: The geographic area that encompasses the subject property’s most direct competition; a subset of the market area.[4]

Lake Monticello is a gated planned unit deployment. It really encompasses all three of these terms into one area. But to give some color to the concepts I often say that neighborhoods are groupings of properties that is made up of homes to live in, shopping and retail to buy groceries and household items and access to major commuting corridors to drive to work. I must mention that in rural Virginia markets that if you do not own an automobile for commuting then you are not able to live there. Where is larger MSAs with public transportation and many live-and-work communities that exist, automobiles are not a requirement in every market.

Lake Monticello has a shopping center just outside of the gate that is anchored with a major grocery chain, as well as a pharmacy and miscellaneous professional offices, restaurants, etc. Also around the exterior of the subdivision is another major chain pharmacy more restaurants, petrol stations, a major hardware chain, banks, medical offices, and professional offices. In short, the subdivision is its own neighborhood. It would also be seen as its own market area as well.

We do need to further delineate the market as the subdivision does contain five distinct sub-markets or competitive market areas. We have the normal subdivision lots, golf-front lots, lots in the acres section, lake-front lots and the condos. We are going took at the regular subdivision lots. Let us start by searching for Lake Monticello detached homes and consider all data for the last 3 years. Wea re also excluding any new construction or lender owned homes. We get back 879 homes, pulling out all homes that are not normal subdivision lots we have reduced the data down to 734 homes.

Let us look at the overall data on a grid and use a trend line to see what the first pool of data is suggesting for price metrics.

In this chart we are showing that the market is still improving on a median sales price per month amount. I am not a huge fan of doing it this way as the the sales price is not looked at applied toa comparable unit. In this market price per square foot is a good metric to utilize.

Using a comparable unit that is dependable gives a better detail of what is happening in the market.

I mentioned earlier that common sense should dictate that higher interest rates should be a cause of values to start tapering downwards. So instead of stopping here, we must look at what else may be going on in the market because these charts show just a facet an done that may prove to be misleading in and of itself.

Let us take a gander at inventory. First let us see what the sold inventory has been doing from a DOM perspective.

At first glance, it looks great.  But look at the far-right side. Things are ticking upwards.

This chart deals with actives and it is starting to tell a less than positive story compared to the sold DOM. It is not horrible as it still indicates less than a month, but it does show an increasing time on market.  The blue bars are the competitive market area, and the gold bars are the market area.

This chart showing the actives and actives interacting. Again, it is not alarming as of this blog, but it is starting to show an uptick. It shows less than a month (0.9) of market time to absorb present inventory, but it is a step towards a negative space.

This chart is an interesting one. It shows the median list to sales price ratio. The two groupings towards the right that are the taller of the bars are indicative of sales closing for prices higher than they were listed for. The interesting part of this is that both groupings that I called out are showing seasonality in the market. We just came out of the highest recent time of high list to sales price ratios. The two highest bars were 104% and 105% respectively.

*Remember that the blue bars are the competing market data where the gold is the overall neighborhood. If you recall the gold bars include the higher priced sections of the market such as the lake front sections, golf course lots and the acre sections. The regular section also has a higher number of investors seeking out rentals for their respective portfolios. While I am not going to break the seal on the rental analysis in this blog, it is coming in the next one. I did a look at the relationship of leasing increases in relationship to the sales market. Stay tune bat-fans, same bat-time, same bat-channel.

Seller paid concessions can be informative of market shifts as well. This chart shows the frequency in which sellers are paying closing costs. The chart above does show a positive as it shows that the frequency of closing costs being paid by sellers has continued to decline. That is good for a seller’s market. If this starts to increase it means that the buyers are gaining leverage in the market.

This is the other seller paid concessions analysis that must be looked at in concert with the previous chart. This shows the actual percentage of sales price that when sellers do pay closing costs how much they are paying. This chart agrees with the previous one.  One may look at it and say that there is a trend starting to uptick, but you must keep in mind that the trendlines will move more in that direction in the chart as 7 months ago it showed the lowest-in-recent-memory. So, a return to normal would indicate an increase, but until more time passes, we would be premature to assume anything quite yet.  This chart is a great barometer of a market transitioning. Frequency of concessions may not increase right away, but when those sellers that closing deals start paying more on each deal, I think we will start seeing a true downwards taper of value happening.

Interest rates and REO inventory both add to this type of analysis, but we have few REO sales in this market presently. I will offer that my firm has seen an uptick recently in pre-foreclosure valuations, but they are still not of any volume that would impact the overall market for arms-length-sales. Obviously, interest rates are influencing the market, but I think the analysis that we just went through is showing the start of what the interest rate increases are causing in the residential single unit market, at least in Lake Monticello, VA.

Reconciling the Data

So what do I think is happening in this market? I am positive that it is shifting towards being less of a buyer’s market. Buyers are losing leverage that much is obvious, but with inventory not yet reacting in any significant manner I think we are headed towards a soft reset. Much of that will be decided by Powell and the Fed. He presently has his Volker hat on and we will have to see how it shakes out. In regards to how I would address this is my appraisal report?

The data shows that the market is obviously increasing, but further analysis does show that the premium has cracks starting to appear. I would not adjust comps at the top most indicator upwards but I would likely temper them upwards with some restraint based on what my data supports. I absolutely would discuss the market conditions and how much ambiguity may be playing into it. As a professional I must say what I see, and I see a market that is transitioning. That is the story I must convey to the underwriter if i am writing a report for a mortgage transaction.

For the appraisers reading this, not addressing the transition would not be advised. I do enough reviews to see what my local peers are doing and many simply avoid any significant market analysis beyond checking boxes. Not stating the obvious in your report will result in issues if and when you are asked to discuss a possible buy back situation with Fannie or Freddie. Their market analysis tools are not just good but some of the best that I have ever seen. If you avoid the analysis at any significant level they will see it.

Remember that we must discuss (summary) the quality of the data that we, the quantity of the data that we have and each and every method and technique used to form our opinions. You have to support what you are doing in a credible manner. Just checking a box does not accomplish this.

Appraisers: Use Your Tools

This is just part of what goes into a residential market analysis for an appraisal report. More is needed to complete this part of the appraisal process, but this was a notable example of what a competent appraiser is looking at when they are doing their jobs correctly. I know it seems like an arduous task and it really is when you do not do this type of work as part of regular assignments, but we do this type of analysis efficiently. Through things like Excel and some other software, we can-do real-time analysis in productive ways. The old days of an appraiser holding up a wet finger to detect the direction of the wind has gone the way of double stick tape and map rub-on stickers.

*****

Stay tuned for the next part of this where I am going to dig into the rental market and the relationship it has with the sales side. The proliferation of investors buying rental units to hold in portfolio was only bolstered in the recent few years, and many appraisers unfortunately ignore it. I think the relationship between the two sectors of the single unit residential market is worthy of analysis and inclusion in the appraisal process.


[1] ESRI

[2] The Dictionary of Real Estate Appraisal 7th Edition. The Appraisal Institute 2022.

[3] The Dictionary of Real Estate Appraisal 7th Edition. The Appraisal Institute 2022

[4] The Dictionary of Real Estate Appraisal 7th Edition. The Appraisal Institute 2022.

Published by Woody Fincham, SRA, AI-RRS, ASA, RAA

Residential appraiser in the Charlottesville and Shenandoah Valley specializing in high-value homes and properties that include equestrian use, hobby farms, High-performance homes (HERS, LEED, Pearl, Earthcraft), large acreage and any residential style property.

One thought on “How Real Estate Appraisers look at Market Analysis

  1. You have made a difficult analysis simple! Every market is different, and the use of the appraisers’ local MLS statistics can explain the transition of the market.

    Liked by 1 person

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: