Real estate professionals have had a very busy year. Homes are selling, often within days, with multiple bids. This is largely due to an extended period of a shortage of home listings. This shortage has driven home prices up across the country. You can see this happening in my graph below, which reflects the relationship between the decline in active listings, aka supply, and the subsequent increase in sales prices in Cuyahoga County, Ohio.
With this being the case, some real estate agents feel that the appraised value is not always reflective of today’s prices. Is that true? After all, appraiser’s use closed sales to develop their opinions of value. And closed sales are clearly historical.
While this is true, appraisers work hard to close the gap between what homes have sold for in the past and what they are likely to sell for today. How?
In a changing market, like most of the country is currently in, we desire to find comparable sales that have sold most recently. However, sometimes, we must go back further in time to find homes that are truly comparable. Especially when valuing complex homes, or homes in which there are not a lot of comparable sales.
In either case, one way that we close the gap between yesterday’s prices and today’s values, is by making time adjustments. How does that work?
The first step is to determine the rate of change in sales prices of competing homes in a neighborhood and/or market area. If sales of competing properties are scarce, we may have to rely on a larger sample of homes, including homes that may not directly compete with the subject, to determining the rate of appreciation, or depreciation, in a market area.
I generally use simple regression. There are other methods that appraisers may also use. Once we have determined the rate of change, we apply it to the comparable sales. How do we measure the time?
We begin measuring time, on the date where the buyer and seller sign the contract. We measure the time from that date to the effective date of the appraisal. I do know that some appraisers may not make time adjustments for sales that have sold with ninety days of the effective date. When the rate of appreciation or depreciation is relatively minor, this makes sense. However, in a rapidly changing market, like the one we are in now, I think it is important to adjust all the way to the effective date of the appraisal.
We make time adjustments beginning at the contract date to accurately measure the change in prices from that time to the effective date of the appraisal.
Sometimes my opinion of value is higher that the contract price. Why? There are numerous reasons why this might be the case. Here’s one. Typically, the effective date of my report is weeks, and sometimes months, after the contract date. Therefore, by the time I complete my appraisal, the market value of the home may have increased, since the contract was signed. It’s also good to remember that the contract price is not a target for the appraiser to aim for. The market value of a home is not always reflective of the contract price.
Due to bidding wars, sometimes, my opinion of value is less than the contract price, because the price has been bid up above market value. This is fantastic for sellers. If a buyer wants to purchase a particular home, and there is competition, they may have to pay more than market value to successfully purchase the home. You can see this in my chart below, which clearly demonstrates that many buyers are paying more than the list price.
This is like a game of musical chairs. When the music stops, by the market resetting, some are going to be left owing more than their home is worth. In the years preceding 2008, due to fraud, banks were providing mortgages on values that were not supportable. Today, if a buyer wants to pay more than market value for a home, buyers are putting their own money down to make up the difference. The good news is that, when the next reset happens, homeowner’s will have more of their own money invested in their property, which will make some think twice about walking away from their loan.
LISTINGS AND PENDINGS
Active listings can be useful because they are indicators of future sales prices. If competing active listings are declining in price, and/or are sitting on the market for longer periods of time, this is an indication that prices are in decline and the market is cooling off. Subsequently, when listing prices are increasing, and marketing times are declining, this is an indicator that future sales prices are going to be higher.
When performing an appraisal, many appraisers apply adjustments to reflect the difference between what homes are being listed for, vs. what they are selling for. Here is a chart that reflects the closed to list price ratio for Cuyahoga County. Notice that for June, July and August, homes are selling for one hundred percent of what they are listed for. In some neighborhoods the ratio is over a hundred percent.
Pending sales are even better indicators of the market, because they are homes that are under contract. Remember, that the contract date is the time appraisers use as a starting point for measuring time adjustments. Pending sales offer valuable insights into what is going to currently and are carefully considered in the appraisal process.
Hopefully, this post helps you to see how appraisers close the gap between yesterday’s prices and today’s values. I hope that you enjoyed this article. As always, I appreciate your being here!
Have a great weekend everyone! Be safe out there!
Looking for a qualified real estate appraiser in your area? Go to www.FindMyAppraiser.com
If you enjoy listening to podcasts, check my new podcast out. I hope you enjoy it! You can find me on Apple Podcast, iHeart Radio, Spotify, Google Play Music, Sound Cloud, Radio.com, RadioPublic, Deezer, Breaker, Stitcher as well as other feeds.
You can also listen right here at Cleveland Appraisal Blog!
If you are interested in stats, and nothing but the stats, for neighborhoods in Northeast Ohio, check out my other podcast. In it, I provide short episodes that provide you with stats on median sales prices, marketing times, housing inventory and other related stats, on specific neighborhoods in Northeast Ohio. You can find me on Apple Podcast, Spotify, Google Play Music, Breaker, Overcast, Pocket Casts, Radio Public or you can listen right here at the Cleveland Appraisal Blog.
Here are some links to other articles and podcasts I’ve enjoyed recently! I hope you will also…
The Housing Market Did Not Fall Like Dominoes From COVID – Housing Notes by Jonathan Miller
Three ways the pandemic has affected buyers – Sacramento Appraisal Blog
Will Homebuyers Love or Hate That Your House Comes with a Hot Tub? (I’m honored to be mentioned in this article. Thanks Emma!) – Home Light Blog by Emma Diehl
How To Avoid Appraisal Issues When Using An Escalation Clause – Birmingham Appraisal Blog
Why Use Graphs? Part III – George Dell’s Analogue Blog
The Con, We Were All Sold a Lie – THE CON 5-Part Docuseries
Newz: Racial Bias and Appraisers? – Appraisal Process Challenges – Housing With 11 Domes – APPRAISAL TODAY