Right now, markets across the country are hot! Many homes are selling in days, with multiple offers. This is due to many factors, one of which is a continued shortage of inventory. On some purchases, buyers are willing to pay more than market value for a home, bring cash to make up the difference between the appraised value and the purchase price. Who would have thought that this would be the case during a recession, brought about by a global pandemic? That leads to an interesting situation when it comes to real estate appraisals.
If there is no market support for an agreed upon price for a home, does it mean that the appraisal is not supportable or realistic? Does it mean that the appraiser doesn’t know how to develop a realistic market value? Should market participants ignore the information that the appraiser is providing?
Appraiser’s aren’t the only professionals that have been accused of getting it wrong, or who are ignored by some in the public. Take epidemiologists for example. If you didn’t know what an epidemiologist was before the pandemic, you probably know now. I’m pretty sure that most would never compare the work of an epidemiologist to that of a real estate appraiser. And rightly so. And yet, there are some similarities. Some in the public do not take our opinions seriously, because our opinions don’t match up with their views.
An epidemiologist analyzes the public health concerns of a given population. They track patterns of disease, and offer their best advice based upon the trends that they see. In the news, Dr. Anthony Fauci, a well-known and highly respected epidemiologist, as well as other medical professionals, are being accused by some in the public, of providing unsupportable information. Has their analysis really been unsupportable?
NO HUMAN CAN PREDICT THE FUTURE
Like real estate appraisers, epidemiologists provide their opinions based upon the best data available at the time of their analysis. The difficulty with the current Coronavirus is that it is new. Furthermore, it does not act like some of the other viruses that have been around for a while. For this reason, there is a lot that medical professionals are still learning.
The analysis they provide is their best to date, based upon the data available to them. However, change is a constant. Furthermore, no human can predict the future. In addition to still learning about this new virus and how it affects us, there are other factors at play, that cannot be predicted. Namely, human behavior. They cannot predict whether people will take their warnings seriously or, as is the case with many, throw caution to the wind, acting as though there is no serious threat? The latter has led to disastrous results.
As time goes on, medical professionals will continue to change their opinions based upon new data that is available to them. To not change one’s opinion when new, or better data is presented, would be foolish. So, it should not surprise anyone that their views on how the disease spreads will likely continue to change as they obtain more information.
APPRAISALS AND EFFECTIVE DATES
So, how does this relate to real estate appraisals? Real estate appraisers also provide opinions. Like epidemiologists and other professionals, our work is based upon the data that is available to us as of a given date. That is why the effective date of an appraisal is so important. Things are constantly changing in the housing market. While change can be gradual, sometimes big events can change things relatively quickly.
An appraisal is a snapshot in time. An analysis of market trends as of a given point in time. While some appraisers, including me, forecast values as part of our work, such as in relocation work and other types of assignments, forecasting is based upon certain assumptions about the future. If those assumptions do not prove to be correct, than it could effect our opinion of market value. Do we always get it right?
Think about a weather forecaster. They have received a lot of education in order to be qualified to predict the weather. Do they ever get it wrong? When they do, does that mean that they don’t know what they are doing, or does it simply mean that things, out of their control, caused changes to their predictions?
When performing an appraisal today, an appraiser does not know what the market is going to look like in six months or a year down the road.
Will this surge in the market continue over the next six months, or will the effects of the pandemic begin to take its toll on the housing market? Will some buyers continue to be being willing to pay more than what market data will support, in terms of value, into the foreseeable future? We do not know. It is going to depend on many things. Observing the housing market in a global pandemic is new for all of us. We are watching the markets carefully!
IT’S NOT ABOUT A GUT FEELING
The opinions of real estate appraisers, epidemiologists and other professionals are not about a gut feeling. It’s about developing a credible opinion, that is supported by the most current market data and good analysis. Our conclusions are credible, that is, worthy of belief, if we have the proper data and analysis to support them.
If you purchase a home today, will the value be more, less or the same next year? We will not know until next year.
Epidemiologist are feverishly analyzing infection rates, death rates, population density, human behavior, and many other factors, in developing their opinions about what will happen in the future.
The same is true when it comes to appraising real estate. Appraisers are also feverishly analyzing market conditions. We are carefully analyzing data like supply and demand, list to sales price ratios, marketing times, as well as other real estate trends. What we are reporting is based upon the best data available to us at the time of the analysis. And while there are some economic factors that may be leading indicators of what the future holds in terms of housing, truthfully, only time will tell.
LISTENING TO THE PROFESSIONALS
Let me share my experience with you regarding the last economic crises we encountered. My slowest years in the business were not in 2008. They were in the years leading up to 2008. Why? Around 2006 many of my opinions of market value did not match what loan officers said they “needed” the number to be. So, when my appraisal came in lower than they desired, they would simply find another appraiser who would hit the number that they were looking for.
After a while, some loan officers stopped sending me work. Ironically, some of those same loan officers who stopped sending me work, would refer me to their friends and family who needed an appraisal, because they knew that I was honest. The code word for honest back then was “conservative”. Ironic don’t you think?
In 2007, I remember completing an appraisal in which I reported that sales prices in a neighborhood were in decline. I promptly received a call from the manager of that mortgage company. He said I was a complete idiot and that there is no way this could be the case, because home prices have not declined in years. I didn’t argue with them. The manager said that they would never use me for another appraisal.
That turned out to be true. Six months later, they were out of business, and that neighborhood was not the only one in decline. I mention this to just remind the public that appraisers, like epidemiologists, report what we see. We don’t make things up. People can listen to us or choose not. As noted earlier, in the current frenzy of housing activity, some are willing to pay more than market value for a home. That’s a personal decision. People have the right to do what they want. I only mention my situation to say that, if a person finds themselves in this situation, and if the market changes direction, they should not blame the appraiser for over-paying for their home.
Speaking of fraud, and what was taking place prior to 2008, there is an interesting docuseries that covers this situation. The film crew was also at the #Appraiserfest in San Antonio, TX in the fall of 2018. I was at that conference. They interviewed appraisers who went through the same thing that I did back then. I think you will find this series interesting. The first episode comes out on August 5th.
Let’s end this serious topic with a little bit of fun. I recently sold a couple of our kayaks and purchased paddle boards. We love them! There is a bit of a learning curve to them though. I hope you enjoy this little video that demonstrates this! We’ll be out this weekend enjoying the shores of Lake Erie on these. Stay safe out there and have a great couple of weeks!
I hope that you are doing good and staying safe and happy!
Have a great two weeks! Thanks, as always, for being here.
Looking for a qualified real estate appraiser in your area? Go to www.FindMyAppraiser.com
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You can also listen right here at Cleveland Appraisal Blog! www.homevaluestories.libsyn.com
Here are some links to other articles and podcasts I’ve enjoyed recently! I hope you will also…
Listen Closely To The Housing Narrative – Housing Notes by Jonathan Miller
A second wave of outbreak & the housing market – Sacramento Appraisal Blog
Will Defunding The Police Effect Home Values? – Birmingham Appraisal Blog
Newz: Basement Rooms in GLA? – Toilet House – COVID Humor – APPRAISAL TODAY