Hello, newer appraisers! As the Chief Appraiser for a national AMC, I’m pleased to welcome you into the world of real estate appraisal. In our profession, understanding how to navigate inventory fluctuations, whether shortages or surpluses, is crucial for your success. The real estate market is an ever changing landscape shaped by supply, demand, interest rates, and economic confidence. Each scenario impacts the appraisal process differently and requires careful judgment, market knowledge, and adaptability.
If you are a newer appraiser, chances are you may not have experienced most, or all, of the cycles.
Inventory Shortage: The Tight Market Dilemma
When housing inventory is low, demand often exceeds supply. This condition typically results in rising home prices, multiple-offer scenarios, and shortened marketing times. While this can be a boon for sellers, it presents several challenges for appraisers:
Limited Comparable Sales
In a low-inventory market, there are fewer recent sales to use as comparables. Since appraisals rely heavily on recent, nearby sales of similar properties, a shortage of comps can make it difficult to determine increasing prices, especially when the market is rapidly appreciating.
You may be forced to use older comps or sales from less similar properties or neighborhoods, requiring more adjustments and increasing the likelihood of scrutiny from lenders and underwriters.
Escalating Prices and Contract Pressure
In competitive bidding situations, buyers may agree to prices well above list value, raising the question of whether the market truly supports the sale price. Appraisers must reconcile contract prices driven by emotion and urgency with actual market support.
Rapid Market Changes
In fast-moving markets, data can become dated quickly. A comparable sale that closed 60 days ago may no longer reflect current market conditions.
As appraisers, we need to analyze listing trends, pending sales, and even active inventory to help support our value conclusion appropriately while adhering to all rules, regulations, and industry standards and practices.
Inventory Surplus: A Buyer’s Market with Its Own Risks
Conversely, a surplus of homes on the market generally tilts conditions in favor of buyers, often leading to price declines, longer marketing times, and increased concessions by sellers. While it may seem like this should make appraising easier due to more sales data, it brings its own set of difficulties:
Declining Values
When inventory outpaces demand, sellers may reduce prices to attract buyers. We must be vigilant in identifying downward trends and adjusting comparables accordingly.
Misjudging a declining market can lead to inflated valuations and increased risk for lenders and market participants. Conversely, being overly conservative can lead to bigger issues. Being conservative isn’t our job as appraisers, but being accurate is.
Increased Concessions and Incentives
In softer markets, sellers may offer closing cost assistance, repairs, or even personal property to entice buyers. These concessions must be analyzed and adjusted in the appraisal to reflect the true cash equivalent value.
We need to dig into contract terms and seller motivations, which are not always transparent, to assess how much, if at all, concessions are impacting the contract price.
Overabundance of Comparables
Ironically, too many comps can also be a problem. In some markets with a surplus of inventory, numerous similar properties may be available at varying price points, creating inconsistencies and confusion.
Appraisers must carefully select the most relevant and recent comps, factoring in condition, upgrades, and exact location, to avoid over or undervaluation.
The Importance of Time Adjustments
I can’t emphasize enough that time adjustments are critical when evaluating properties in fluctuating markets. They allow you to account for changes in market conditions over time, ensuring your appraisal reflects the most current market value. Here’s how to handle them effectively:
- Analyze Market Trends: Keep an eye on how property values are trending over time. This helps you determine whether a time adjustment is necessary and how significant it should be.
- Support and Document Your Adjustments: Clearly explain why and how time adjustments were made in your appraisal report. You will need to “show your work”, now more than ever.
- Stay Informed: Use reliable data sources such as market reports and indices to support your time adjustments. This ensures your market assessment is supported. There are several data providers and even appraisal software features that integrate with your MLS that provide such support.
- Don’t Avoid them: Not making a time adjustment, is in fact determining an adjustment and that needs support as well.
How GSEs Shape Appraisal Practice
Government-sponsored enterprises such as Fannie Mae and Freddie Mac have clear expectations for how appraisers handle changing market conditions. They require analysis of trends in the market, as well as appropriate time adjustments when values are rising or falling. Appraisers may also use House Price Index data from the Federal Housing Finance Agency when local data is limited, provided they explain the reasoning and connect it to actual market activity.
Adjustments, data sources, and methodologies must all be clearly documented so that the report withstands scrutiny.
Adaptability is Key
Whether in a market of scarcity or abundance, our role as appraisers is to provide a credible, defensible opinion of value. This requires not only technical expertise in appraisal methodology but also real-time market awareness, compliance with GSE requirements, and sound professional judgment. As market cycles continue to shift, our ability to adapt and support every conclusion remains the hallmark of sound appraisal practice.
Regardless of your client, or location of your assignment, our team of appraisers is here to assist you with questions. We at AXIS are a community of learners, happy to learn and grow within our profession and support you on your journey. You can contact me at: askaxis@axis-amc.com.
Jim Jenkins
Chief Appraiser
AXIS Appraisal Management Solutions
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Written by : Jim Jenkins
Chief Appraiser, AXIS Appraisal Management Solutions