This article was first published on the Ann Arbor Appraisal Blog.
As of August 7, 2018 Selling Guide, the 1004MC is no longer required by Fannie Mae. Freddie Mac and others may follow suit, but this does not stop individual lenders from requiring it to be included as a form of evidence of market trends support.
Fannie Mae will continue to require analysis of the trends within the report, as noted in the guide. The exact verbiage found in the 8/7/18 updated Selling Guide is:
The appraiser’s analysis of a property must take into consideration all factors that affect value. Because Fannie Mae purchases mortgages in all markets, this is particularly important for neighborhoods that are experiencing significant fluctuations in property values including sub-markets for particular types of housing within the neighborhood. Therefore, lenders must confirm that the appraiser analyzes listings and contract sales as well as closed or settled sales, and uses the most recent and similar sales available as part of the sales comparison approach, with particular attention to sales or financing concessions in neighborhoods that are experiencing either declining property values, an over-supply of properties, or marketing times over six months. The appraiser must provide his or her conclusions for the reasons a neighborhood is experiencing declining property values, an over-supply of properties, or marketing times over six months.
When completing the One-Unit Housing Trends portion of the Neighborhood section of the appraisal report forms, the trends must be reflective of those properties deemed to be competitive to the property being appraised. If the neighborhood contains properties that are truly competitive (that is, market participants make no distinction between the properties), then all the properties within the neighborhood would be reflected in the One-Unit Housing Trends section. However, when a segmented or bifurcated market is present, the One-Unit Housing Trends portion must reflect those properties from the same segment of the market as the property being appraised. This ensures that the analysis being performed is based on competitive properties. For example, if the neighborhood contains a mix of property types not considered competitive by market participants, then a segmented or bifurcated market is present. The appraiser should also provide commentary on the other segment(s) of the neighborhood when segmentation is present.
What does this mean to the residential practitioner operating in the mortgage space? It means that the requirement for analyzing the market remains, and it is now up to the practitioner to support their opinion, without the benefit of what many appraisers consider a flawed format. Appraisers can now choose how they present their analysis, which may include multiple sources to support an opinion. We have great flexibility related to the ways that we compile and present our analysis if the form is not required. This article lays out a few ways of doing so, although there are others.
Fannie Mae is clear that the one-unit housing trends section should reflect properties that are directly competitive with the property being appraised. They are seeking competitive properties, not necessarily the properties that are operating within the neighborhood as a whole, although analysis of the entire market is still relevant. What is requested in the forms, is the subject market segment as noted above? This has long been the complaint of appraisers in using the 1004MC, as quite often, there are simply too few properties that are competitive to have any meaningful information. There is nothing stopping the appraiser from completing two 1004MC forms, one specific to the market segment as previously required, and one that relates to the neighborhood. In that manner, both a macro market analysis and a submarket analysis have been completed and the appraiser can simply tie the two together with a brief summation.
Other methods include trends such as rolling annualized monthly trends as shown below.
The data array above considers all sales other than the “to be built” properties in a specified school district, over a 20-month period. The sales are run year-to-year, advancing on a monthly basis. This way it is possible to see changes in a subtler manner as opposed to year-to-year study when related to any adjustments that are made for changing market conditions. For example, comparing a property that went under contract in April 2018 to the appraisal effective of August 13, 2018, lines 16 and 20 would be compared. This can be used in combination with the submarket chart, to see what is happening in the market. Ideally, both median prices and price per square foot are analyzed.
The columns in the chart relate to the timeframe, the number of sales, the median list and sales prices, the list to sales price ratios, gross living area (GLA) and price per square foot (PPSF). The reason that GLA and PPSF are included relates to changes in size affecting sales prices. The final two rows in the chart relate to how many listings are active and under contract as of the date of the study, referred to as the “contract-to-listing ratio” which is relevant. In my opinion, this is one of the most relevant pieces in the analysis, as indications of change are noted before sales close. It also supplies information related to supply and demand. It also supplies information related to supply and demand. It is noted that each of these segments takes the median list price and median sales price together for a median LP Median/SP ratio, as well as size and price per sqft.
It is evident by observing this data, that the market has increased over time — from $328,000 to $355,000 or 8.23% (row 8 to 20) — but in the past year, not as substantial an amount, from $349,900 to $355,000 or 1.46% (row 8 to 20). Price per square foot has increased from $148.08 to $160.49 over the 20-months period (8.38%), and $156.72 to $160.49 year to year (2.41%). What this shows is that, although there was an increase of over 8% in the measured period, the past year does not show as marked an increase, and it could be construed as stabilized or stabilizing, based on the appraiser’s analysis, in particular after studying the current contracted sales.
There is another piece to this puzzle, and that is how many houses are showing as under contract in this macro market, and what the supply looks like relative to demand. This is the “contract-to-listing ratio” which shows 90 houses on the market total, with 22 under contract. This is a ratio of 24.44% in this segment. By employing this type of analysis on each appraisal report completed, it is possible to see a shift in the market start to occur before sales prices reflect it. In my market, 24% of sales under contract is indicative of a normal market, one that is neither favoring buyers or sellers. What is also extremely meaningful is the listing prices of the houses under contract compared to the listing prices of the previous segment’s sales. The listing prices of those properties under contract are now $10,000 lower than the list prices of the previous period, in spite of a small increase in median size. This tells us that we may have a price correction occurring, but before closing, we cannot be certain. We can, however, use this information and explain to our client, what we see happening in the market.
Fannie Mae wants to see the specific market segment, and not necessarily the macro market — although that is relevant as well since understanding the larger macro market is necessary before an assignment-specific market can be analyzed. The submarket in this instance shows an increasing market in prices, but the median asking prices of the contracted sales are 13.33% lower than the asking prices of the previous segment’s sales. This is in part due to a decrease in median gross living area, and also in part due to a much smaller segment of data for analysis. Nevertheless, the market also shows a greater absorption of these properties than the macro market as the contract to listing ratio shows over forty percent of the properties offered as under contract. We could easily see this market as either stable or still increasing slightly. It is up to the appraiser to explain their thought process on the conclusion of market trends.
It is possible to structure something similar to what is reflected in the chart above with whatever is considered relevant by the appraiser doing the analysis. The appraiser might wish to do year-to-year, month-to-month, monthly, weekly, or whatever period the appraiser considers relevant. Whatever is chosen provides support for the appraiser’s opinion as to market trends. In the event of a change in the market, we have some evidence-based data supporting our market trends conclusion.
An additional way to look at data would be to take each sale in a given submarket and lay it out over time to visually show the reader what is happening with the market. In this one, I modified the sales data slightly by keeping the same criteria but eliminating properties that would not be competitive with the subject even though they fit within the search parameters. This is also a logical way to look at the market because if the buyer of the subject would not consider those properties comparable, and even more important if the buyers of those excluded properties would not consider the subject comparable, they should be taken out of the equation. Using that same dataset but extending it out to two years prior to the effective date, the following chart can be included. It also shows an increasing trend after a slight dip in mid-2016.
As much as we might want to rely on our own data, there are other sources available that can also help with a determination of market trends. Using the same hypothetical property above, it is easy to pull various sources such as Realtors Property Resource (RPR), Realist, Trulia, Movoto, and others.
The RPR sample below uses a sale in the same area above and shows the following graph. The property price increased over time but is generally stable over the past year. The zip code shows an increasing price, and the county prices increasing steadily, as to, the entire state of Michigan. This is useful additional data to include either in the report itself or in the workfile for posterity.
Most appraisers have access to both RPR and Realist via their MLS. An example of market trends from Realist is shown below. This data is not related to the subject submarket but does include the zip code and city, as well as county, showing mixed trends data compared to the appraiser developed data addressed above. If one relies on this information, the market shows as increasing after a dip over the winter.
Trulia, Movoto and other similar applications are not able to differentiate between the submarket and the overall market, but are useful and provide additional sources of support. Movoto enables the user to observe data trends over different segments of time, and by price per square foot as shown below. It also allows segmentation between single-family properties and condominiums. Examples of properties in the same market as the sample discussed throughout this report are shown below.
(snapshot from Trulia for Dexter)
Most Board of Realtors have market statistics on a monthly basis. These may be broad and contain the entire market that is covered by the board, or may be narrowed to a school district or zip code. The Ann Arbor Area Board of Realtors only shows the entire market, but a snapshot from July 2018 is used to help the intended user understand what is going on with the macro market at a minimum.
Another way to support change is to observe sales that resell within a defined period. This is particularly useful when the subject property has a recent prior sale. It helps provide a basis for where the property was at the time of the prior sale, compared to the market today. Most MLS have a data exportability, and it is simple to set up a search within your parameters, observe any sales that resold, and then compare possible changes between the sales periods. My research in this market isolated two sales that were within my search parameters over a 2-year period. One set sold 4/17/17 at $399,500 and then again on 4/9/18 for $647,500. That is an increase of 62% and unlikely market appreciation. Looking at the MLS comments and photos, the difference relates to the first sale as a more original property, somewhat tired to today’s standards. The second sale shows a gut-rehab with HGTV style bling. I could use this sale/resale as evidence of value added for a significant remodel, but would not want to rely on it for market change.
My second set of data included a property that sold 8/9/16 for $411,500, and then again on 6/27/17 for $439,000. This is an increase of 6.68%, but the most recent sale was over a year old. The only change noted was a new roof in the interim. Given the data shown in the charts above, the increase was in line with the submarket increase and is further support for the increase that was occurring before January of this year but does not provide good information for the current trends.
All of this information combined can help support the opinion of where the market is as of the effective date. More importantly, it can help defend the report in the event that the market changes and the appraiser is accused of having ignored market conditions that were noted at that time.
Many participants in the market are concerned there is a shift that is inevitable, either on the immediate horizon or off a few years. In any event, with the elimination of the 1004MC as a requirement by Fannie Mae, appraisers are not absolved of supporting their opinion of market conditions at the time of the appraisal report, and all of these tools and others are available to the appraiser to better help support the decision.
Let’s view the elimination of the 1004MC as an opportunity to really shine and support our work. After all, we are the neighborhood experts, but we need to be compelling in our decisions when faced with increased computer models and data alternatives. This is our opportunity to show the value that we bring as analytical researchers.
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