Thursday, June 1, 2023 | The Latest Buzz for the Appraisal Industry

Appraising Well in a Fast-Changing Market

What should appraisers know before they sign the appraisal report and deliver their professional opinion of value? Pretty much everything. Many appraisers working in today’s marketplaces are about to find out how important this is.

I started thinking about this when I saw the news coming from the National Association of Realtors about how far the current real estate market is out of balance. According to their public website, in June 2022, the supply of existing homes for sale would last 3 months. This month’s supply measurement remains 0.9 months less than what it was in 2019.

I am in the camp with many that believe the market will continue to feel price pressure, at least until inventory levels begin to return to normal (2019 or early 2020 levels, at least).

This is important information for appraisers, though it may not appear so at first.

Why inventory levels matter to appraisers

According to the Uniform Standards of Professional Appraisal Practice (USPAP), the rules that all professional appraisers are required to abide by, appraisers must take into consideration all market trends and other influences on property value in their valuation opinions. USPAP Rule 1-3 (d) (v) makes this clear.

Inventory levels have an impact on property valuation, at least in the short term. Appraisers need to take this into account and be relied upon as the voice of reason when industry participants release their news, whether that be NAR, Zillow, Case-Shiller or anyone else with some data and an index.

I can see why loan officers, real estate agents, or buyers might push back on appraisers’ conclusions.

Consumers today have so much data available to them from so many sources. They can surf to Redfin or any of the other big real estate company websites and come away with some very compelling data that could lead them to believe that, given the current trendline, their homes are worth 30% more than when they bought them.

Is that true? Maybe, but it falls to the professional appraiser to measure that. When the appraiser analyzes the appropriate data, they will need to keep a few things in mind.

Appraising real estate in a fast-changing market

The first thing I would say about this is that the longstanding rule that the best defense is a strong offense applies. Before anyone even tries to tell you what the property value index is for a given marketplace, the professional appraiser should already be aware of what is made available to market participants.  Appraisers track such data. It’s just part of our job.

The second thing, and most everyone who is tracking this data already knows this, is that this data and the indexes that spring from them are all lagging indicators of the health of a given market. The data we see is typically a few months old. In a market that moves as quickly as ours is, often that can be too old.

Market value indexes, just like the other data we use in our analysis, such as marketing time, exposure time and inventory levels, is taken into account when we develop our professional opinions of value. Not all of the data is brand new, but it all enters our consciousness and gets weighed into our decision-making process.

Consumers, and sometimes other industry professionals, don’t typically operate like that. They see an index and then start scribbling numbers on the back of an envelope. There is a reason lenders do not lend money based on analysis prepared by persons who have an interest in the property or the transaction.

The third thing I would urge professional appraisers to bear in mind is that this market is changing rapidly. Even when markets don’t appear to be changing rapidly, some event could occur, say a global pandemic, or sharp increase in the cost to borrow, that could change everything in a very short period of time.

This means that we need to be the voice of reason by taking the long view. Looking at month-over-month or year-over-year property appreciation numbers for a neighborhood may look dramatic, but much less so when the timeline is extended back in time. Looking at a trend line that extends back multiple years will almost always give us a perspective not often seen in the typical report form output.

If we don’t do this, our values could skew, high or low, exposing our lender clients to additional risk. It could also lead to more time spent responding to revision requests and report rework, things none of us have time to do.

Does this mean that we should discount or ignore current data, including market indexes? Of course not. It just means that as professional real estate appraisers, we add that data to all of the other information we track that leads us to a supported opinion of value developed in accordance with an agreed upon standard. It’s how we protect our industry from risk when things are changing rapidly, like they usually are.