Category Archives: Reviewer Thoughts & Tips

The main attempt of this blog is for me to give back to the real property valuation industry. I can’t take my knowledge with me when I leave this world. So, my goal is to share everything I know through writing articles, teaching classes and seminars, and this blog.

I usually receive several questions a week from fee appraisers, appraisal reviewers, and chief appraisers regarding appraisal reports, FIRREA, or USPAP. Hopefully, these will provide most of the content for this blog. In this way, we can all learn from the same issue under discussion. Obviously, items will be redacted as needed to maintain confidentiality.

If I hit a lull in inquiries, I have a huge treasure trove of topics to draw on. I will try to discuss interesting topics I have encountered in international reports. It is a neat world out there and us American valuers should be amazed at how the rest of the world handles various items.

Yes, I will give my interpretation of FIRREA and USPAP. Everyone knows I am not shy. However, to CYA, I need to give the standard verbiage that my interpretations are not legal interpretations….they have not and cannot be approved by examiners and regulators. Each Bank should contact their specific examiner and/or the appropriate regulator in Washington DC that interprets FIRREA.

UPDATE TO MY SUBDIVISION POST STARTED IN JULY

OCTOBER 3, 2022 – As I noted back in July, appraisers of residential subdivisions needed to start forecasting a SIGNIFICANT slowdown in lot and home sales. Now they should add to that a forecast of declining lot and home prices.
For those who have been around to see numerous downturns in the past 35+ years (yes, I am officially old!), the one thing we can be certain of is that all of those builder take-down contracts and letters-of-intent are worth less than the paper they are written on.
I haven’t reviewed a subdivision appraisal in a few months (I guess that is saying something about the market). But, as late as June or July appraisers were still relying on builder takedown contracts. Hopefully, that has totally ceased. Some pertinent info follows.
The Fed’s hurry-up offense is having an equally dramatic effect on the U.S. housing market. In response, home builders are walking away from land deals. In the second quarter, KB Homes abandoned 8,800 previously controlled lots while Lennar walked on 10,000 home sites. More than a fifth of home builders are taking the same action. (Quill Intelligence)
Home buyer cancellations neared 18% in July with Texas being tops at 27%. (John Burns Consulting)
In Western markets, cancellations hit 38% in the week ended September 15th. They’ve been above 30% for 14 straight weeks. Prior to April, the cancellation rate held in a relatively tight 7-12% range for 23 straight months. (Zelman & Associates)
Only one homebuilder has announced layoffs so far. Stanley Black & Decker announced 1,000 jobs in finance are being cut. Job cuts occur about 4 quarters after housing permits peak. 2023 will be ugly for homebuilder employees.
Remember, very slow future absorption and declining lot and house prices. I will post when I see the first appraiser to have the testicular fortitude to do this in an appraisal:)
Shalom,
The Mann

STEP 3 IN THE HOUSING MARKET HAS OCCURRED

OCTOBER 3, 2022 – My June 14th post about Step 2 occurring said it would be easy to look back in 3 months and see that the housing market had peaked. Sure enough, 3 months later everyone can now see a top is in place and a correction has been well underway.
Step 3 is an acceleration in the slowdown of price appreciation. A summary of indicators follows.
The American Enterprise Institute’s (AEI) Home Price Appreciation (HPA) Index peaked at 17.0% in March and declined to 11.3% in August. AEI projects it will decline to 4%-6% by December.
The S&P Corelogic Case-Shiller House Price Index fell 0.4% on a month-over-month basis in July for the first time in 10 years. On a year-over-year basis, the increase in home prices decelerated by the most in the index’s history, said Craig J. Lazzara, managing director at S&P DJI.
Lastly, the FHFA House Price Index dropped 0.6% in July vs. June.
These are early signs that Step 4 will be upon us sooner than later. That is when the annual change goes from appreciation to depreciation. With mortgage rates soaring towards 7% the decline in home prices is more certain than ever.
What will baffle people is the continued low supply of available housing combined with prices declining. As I have long said, you don’t have to buy, but often you do have to sell. With a lack of buyers, sellers will continue to lower prices. In September, the number of households likely to buy a house in the next 6 months fell to its lowest level since 2010.
Shalom,
The Mann

SUBDIVISION APPRAISERS NEED TO ADJUST ABSORPTION IMMEDIATELY

LAST UPDATED – SEPTEMBER 18, 2022

JULY 17, 2022 – REMINDER TO CHECK BACK AS I WILL UPDATE THIS WITH NEW INFORMATION AS I RECEIVED SUCH.

There are times when the data available to us real estate appraisers suddenly become (almost) useless. For example, after Hurricane Katrina almost all real estate data in New Orleans prior to the hurricane was all but worthless. Manhattan had 9/11. The entire country had the lockdown in Spring 2020.
Today the entire nation is facing this in regard to residential real estate. Basically, the data thru Spring 2022 is no longer reflective of current market conditions. Nor future market conditions.
It is time for subdivision appraisers to look almost solely through the windshield and no longer the rear-view mirror. There is no excuse for using absorption rates over the past year to forecast absorption over the next year or two.
We have the training to forecast future supply and demand. It is critical we do such now. For those familiar with the Appraisal Institute’s books on Market Analysis, you know that it is time to perform Level C analyses. Look forward, not backward.
I will add items to this post as they come out. For starters, the following items are support for reducing absorption rates significantly. I am sure you will come across similar items in your research.

ADDED SEPTEMBER 18th – Mortgage rates are above 6% for the first time Since 2008. These rates are still cheap. But, people have been spoiled with the artificially low rates over the past decade. If you can’t afford a loan at 6%, you shouldn’t be buying a house anyway.

Per the Mortgage Bankers Association (MBA), the average home purchase loan size is only increasing at a 2.1% YoY rate now versus a 12.1% YoY back in April. This is a leading indicator for home prices.

Redfin’s weekly pending home sales tally of homes under contract has tightly tracked MBA purchases this year. Through the week ended September 4, this forward-looking gauge was down -29.3% versus year ago levels. Because demand is softening, supply is likewise loosening — Redfin’s age of inventory has risen on an annual basis since mid-July. (Quill Intelligence)

Pinto now predicts that by the December holidays, average home prices will hover around 6% higher than 12 months earlier. But the first seven months of 2022 are already in the can, and they show a total gain of 10% from January through July. To register a 6% increase for the year, prices must fall 4% over the next five months. That course would mark a severe reversal from the ever-rising tide of the last few years. And the drop will be anything but consistent across America. “The declines in the West will continue to be the most severe,” says Pinto. “The high end will also continue to be hit hardest.” So far, America faces nothing resembling an outright crash. But for the average homeowner, it will hardly bring cheer that the closer they get to the holidays, the more they’ll be watching the value of their cherished ranches and colonials fade. (American Enterprise Institute)

MBA noted that in addition to mortgage application activity remaining at a 22-year low, it was seeing, “average purchase loan sizes continuing to trend lower, as purchase activity at the high end of the market is weakening.” Blasting a warning to not be premature in looking for a bottom, this report was followed by the National Association of Realtors’ July Pending Home Sales Index, which registered the lowest reading since September 2011. Because this gauge is the most leading within the residential real estate universe, the best that can be said is to expect more of the same. (Quill Intelligence)

ADDED JULY 29th – Taking the unexpected in turn, June new home sales fell 8.1% to a 590,000 seasonally adjusted annual rate; each of the prior three months were revised downward. Chalk up revisions to cancellations. Nonetheless, the -50.5% annualized decline in the six months ended June has so few precedents, you can count them on one hand: 1966 near recession, 1980 recession, 1981-82 recession, 2007-09 recession and 2010 payback from home buyer tax credit. 
 
Pending total home sales collapsed 8.6% in June to the levels consistent with the last three recessions. The near-40% annualized plunge in the six months ended June was rivaled by the 2007 housing bust, 2010’s homebuyer tax credit hangover, and the COVID-19 flash recession. (Quill Intelligence)

((One of the best services I subscribe to is Quill Intelligence by Danielle DiMartino Booth. They analyze data in unique ways. Homepage – Quill Intelligence They have a Daily Feather sub that I think is $500/year. I guaranty it will be the best $500 you spend on a subscription!))

From Joel Kan, a Mortgage Bankers Association economist. ‘After reaching a record $460,000 in March 2022, the average purchase loan size was $415,000 last week, pulled lower by the potential moderation of home-price growth and weaker purchase activity at the upper end of the market.’

“Americans are canceling deals to buy homes at the highest rate since the start of the Covid pandemic. The share of sale agreements on existing homes canceled in June was just under 15% of all homes that went under contract, according to… Redfin. That is the highest share since early 2020, when homebuying paused immediately, albeit briefly. Cancelations were at about 11% one year ago. Higher mortgage rates and surging inflation are causing many potential homebuyers to reconsider their purchases.” CNBC (Diana Olick)

((I will add that a local Realtor told me that in the past 7 years she had six purchasers walk away from their contract. In the past 2 weeks, she had 16 (!) purchasers walk away.))

On Tuesday, Zumper’s National Index for two-bedroom apartments falling 2.9% in May was all the rage in chatrooms (link above for full skinny). After the close, Black Knight dropped this bomb: “The annual home price growth rate fell by more than a full percentage point in May, the largest monthly decline at the national level since 2006.” We would remind you that May is the strongest seasonal time of the year for rent and home price gains. Both have begun to stumble. (Quill Intelligence)

All in all, about half (53) of the metros in this analysis saw more than 25% of home sellers drop their asking price in May. More than 10% of home sellers dropped their price in all 108 metros, driving the national share of price drops to a record high.  The uptick in price drops is symbolic of the slowdown in the housing market. Many buyers are backing off amid skyrocketing home prices, surging mortgage rates, high inflation and a faltering stock market.  (Redfin)

June 27 – Bloomberg (Alex Tanzi): “US cities that saw some of the biggest jumps in home prices during the pandemic now have the largest shares of price cuts, according to… Zillow… Overall, the proportion of active real estate listings with lower prices has increased in all 50 of the largest US metropolitan markets tracked by Zillow. In these cities, 11.5% of homes saw a price cut in May, on average, up from 8.2% a year earlier. The share of lower listing prices rose the fastest in real estate hotspots like Salt Lake City, Las Vegas and Sacramento, California… Among the 50 metros in Zillow’s data, 32 had more than 10% of listings with a price decline.”

June 30 – Bloomberg (Prashant Gopal): “The housing slowdown is helping to solve one of the US real estate market’s most intractable problems: tight inventory. With fewer buyers competing, the number of active US listings jumped 18.7% in June from a year earlier, the largest annual increase in data going back to 2017, Realtor.com said… And new sellers entered the market at an even faster rate than before the pandemic housing rally began… Active listings more than doubled from a year earlier in metro areas including Austin, Texas; Phoenix; and Raleigh, North Carolina, the data show. They climbed 86% in Nashville, Tennessee, and 72% in the Riverside, California, region.”

June 29 – New York Times (Conor Dougherty): “For the past two years, anyone who had a home to sell could get practically any asking price. Good shape or bad, in cities and in exurbs, seemingly everything on the market had a line of eager buyers. Now, in the span of a few weeks, real estate agents have gone from managing bidding wars to watching properties sit without offers, and once-hot markets like Austin, Texas, and Boise, Idaho, are poised for big declines.”

“Despite the small gain in pending sales from the prior month, the housing market is clearly undergoing a transition,” says NAR Chief Economist Lawrence Yun. “Contract signings are down sizably from a year ago because of much higher mortgage rates.” Pending home sales have fallen 13.6% from a year ago. Economists have pointed to rapidly rising mortgage rates to explain buyers growing more cautious. The monthly payment on a median-priced single-family home, assuming a 10% down payment, has risen by about $800 since the beginning of the year due to the increase in mortgage rates. Rates have jumped by 2.5 percentage points since January.

Home buying conditions for the top third match the lowest on record. If you’re curious, that top tier is responsible for 58.7% of home sales. By extension, they account for 56.5% of furniture sales. In a weekend chat with Ivy Zelman, she said she expects home inventories to be up by 70% YoY by the time we ring in the New Year. Redfin’s latest data corroborate the downside building — the brokerage’s proprietary gauge of pending home sales fell 10% YoY to the lowest since May 2020 while requests to tour homes sunk 16% YoY, the biggest decline since April 2020 when the pandemic slammed the sector. (Quill Intelligence)

On the heels of the release, Zelman & Associates warned, “In the months ahead we expect homebuilders to respond to softening demand with increased incentives and even price cuts in an effort to stimulate activity.”
 
Excerpts from Monday’s NAHB corroborate Zelman’s concerns: 
 “Production bottlenecks, rising home building costs and high inflation are causing many builders to halt construction because the cost of land, construction and financing exceeds the market value of the home.”

“In another sign of a softening market, 13% of builders…reported reducing home prices in the past month to bolster sales and/or limit cancellations.”

“Affordability is the greatest challenge facing the housing market. Significant segments of the home buying population are priced out of the market.”

Rather than move, a growing number of investors are making their way for the exits. As reported yesterday by Bloomberg, KKR, Blackstone and Amherst are among housing investors who have “cut buying activity by more than 50%.” At least they’re not joining Starwood Capital in jettisoning portfolios of single-family rental portfolios…yet. Yes, this will leave a nasty bruise on a market overly dependent on leveraged, deep-pocketed, price-agnostic buyers. (Quill Intelligence)

((I will finish by adding this thought. With interest rates up at least 250bp since the beginning of the year, I believe it would be prudent for appraisers to look at the past sales rate for houses that were priced about 50% higher than your subject’s houses will be. My logic follows.

Your subject expects to sell houses at $400,000. Assuming a 30-year mortgage with a 5.5% interest rate, the monthly payment will be $2,271. I just assumed a 100% LTV to make the analysis shorter. We all know that people buy a monthly payment, not a price. Last year, the same $2,271 monthly payment at a 3.0% interest rate could buy a $540,000 (Rounded). Therefore, I think it would be better to look at the past absorption rate for houses in the $550,000 price range instead of the $400,000 range.

That said, we still need to look to the future. All past absorption rates still need to be adjusted downward SIGNIFICANTLY. I don’t know by how much. Personally, I would apply a 50% drop to begin with. In a few months the data may well suggest a 75%+ drop. And I wouldn’t project any rebound for at least 2+ years. My two cents.))

Shalom,

The Mann

HOUSING MARKET SHOWING SIGNS OF TOPPING

APRIL 14, 2022 – The housing market has been incredibly strong since the pandemic started two years ago. Prices are increasing at a record pace. The supply of houses for sale is at an all-time low. Of course, what goes up, must come down. But, when…Tops in financial markets take awhile to form. Bottoms are usually a spike panic low – a V-shape.
We are starting to hear of markets where list prices are being lowered in mass. With mortgage rates up from around 3% last Fall to 5% this week, the number of potential buyers has dropped by many millions.
It will take awhile for the momentum to slow, stop, and then reverse. But, the signs of this occurring are in place and starting to mount.
One leading indicator I follow peaked in the 1st quarter of 2006. This was a full 2.5 years before the Lehman Brothers event the public recalls as being the start of the last recession. Of course, the recession started in 2005 and 2006 and Lehman Brothers (and others that went under) was the end result of the decline that had already occurred. In fact, this indicator bottomed in the 1st Quarter of 2009 and turned up from there.
This same indicator peaked in early December 2021. It has declined 29% since then. That doesn’t mean home prices will decline this much. (For perspective, the leading indicator declined about 85% and house prices declined about 30%.) It just suggests a peak in the housing market is on the horizon. The Case-Shiller U.S. National Home Price Index topped out at the end of the 2nd Quarter in 2006. Just a few months after the leading indicator suggested it would. I think the current momentum is too strong to have prices turn down this year. In fact, it will be tough to have prices turn down next year. But, it is now a decent chance of occurring.
Economists will confirm that as the housing market goes, so goes the overall economy. If the housing market slows done and rolls over, expect the same for the national economy.

Shalom,

The Mann

APPRAISAL REVIEW QUESTION

FEBRUARY 22, 2022 – I received the following question:
Q: If I as a bank appraiser chose to do an in-house appraisal, will it need to be reviewed? If so, what is the benefit and why not just use one of my vendors?
As appraisals are rarely done in-house, I have never thought about this situation. I contacted the Regulators and received the following answer.
A: When the residential threshold was increased it also amended the agencies’ appraisal regulations to require regulated institutions to subject appraisals for federally related transactions to appropriate review for
compliance with USPAP. This became effective January 1, 2020 and is now part of the regulation. As such, a bank can be cited for a violation of law if the review is not completed.
We do not dictate who performs the review only that the reviewer is competent and independent of the transaction; the reviewer can be from the same appraisal department as the individual who performed the appraisal. The bank may perform the review internally or out-source the review.

Now we all know. As always, feel free to ask me any question regarding FIRREA. If I don’t know the answer, I will find it out.

Stay well and safe out there,
The Mann

DATE OF VALUE DIFFERS FOR APPRAISALS AND EVALUATIONS

JANUARY 8, 2021 – It only took the Interagency Appraisal and Evaluation Guidelines (IAEG) document being out for a full 10 years for me to be made aware of the difference in Date of Value for Appraisals versus Evaluations.  As they say, you learn something every day!

For Appraisals, the IAEG states:

The estimate of market value should consider the real property’s actual physical condition, use, and zoning as of the effective date of the appraiser’s opinion of value.  (emphasis added)

In my 35 years of doing appraisals and appraisal reviews, the ‘Date of Value’ has always been the last date the appraiser(s) inspected the subject.  Usually, there is only one inspection and that is the Date of Value.  Of course, this is for Market Value and Market Value ‘As Is.’  We are not talking about prospective values.

For Evaluations, the IAEG states:

Provide an estimate of the property’s market value in its actual physical condition, use and zoning designation as of the effective date of the evaluation (that is, the date that the analysis was completed), with any limiting conditions.  (emphasis added)

‘The date that the analysis was completed’ is what us valuers call the Date of Report.  The Date of Report can be the same as the Date of Value, but that rarely occurs.  For appraisals, nearly 100% of the time the Date of Report comes after the Date of Value.

In conclusion, the IAEG wording indicates that the Date of Value for an Appraisal is what it has always been.  However, the Date of Value for an Evaluation is the Date of Report.

For Evaluations, I have always assumed the Date of Report was also my Date of Value.  I am not sure why.  I just felt that my analysis did indeed go thru the day I was finishing the Evaluation.  So, that was my Date of Value.  Blind luck I guess.

As an aside, it has been suggested that Evaluators add an Extraordinary Assumption to their Evaluation Report that assumes no material changes have occurred between the date the subject was inspected and the Date of Report.  Probably not a bad idea.  I won’t digress into my rant that I don’t like including Appraisal/USPAP items (e.g. Certification, Hypothetical Conditions, Extraordinary Assumptions, et al) in Evaluations.  It’s your Evaluation, do what you want to CYA.

Lastly, I have checked with the Regulators and sure enough this is a difference that was overlooked.  Hopefully, in the next revision this will be addressed.

Happy New Year!

The Mann

 

GEORGIA CLARIFIES LAW ON EVALUATIONS

SEPTEMBER 26, 2020 – The following is from the Appraisal Institute’s Washington Report:

The Georgia Real Estate Commission & Appraisers Board on July 30 adopted a rule change that “eliminates language that has caused confusion in the industry concerning when Georgia appraisers can conduct evaluations.” The change addresses the reporting format for evaluations that are prepared by appraisers for financial institutions that are not regulated by a federal financial institution’s regulatory agency.
The previous rule stated that evaluations are allowed to be “prepared in any reporting format, such as, but not limited to, a self-contained appraisal report, a summary appraisal report and a restricted use appraisal report if the reporting format meets the requirements of the nonfederal financial institution.”
The updated rule, which took effect Aug. 19, removes specific references to the transactions for which an appraiser may provide an evaluation, stating instead that appraisers can provide evaluations “for any transaction that qualifies to be performed as an evaluation under the Interagency Appraisal and Evaluation Guidelines.”
The rule also eliminates enumeration of an evaluation’s required content in favor of language that states, “at a minimum, the development and content of an Evaluation Appraisal shall comply with the guidelines set forth in the Interagency Appraisal and Evaluation Guidelines.”

THE APPRAISAL OF REAL ESTATE – 15TH EDITION

SEPTEMBER 26, 2020 – The Appraisal Institute has published the latest edition of the industry’s bible.  I will let them describe noteworthy items in the new edition.  See below.  You can purchase it at their website.

“The Appraisal of Real Estate,” 15th edition, is a book that fits current times. It reflects a renewed commitment to the essential principles of appraisal and the sound application of recognized valuation methodology. In addition to updated information on changes in real estate markets and valuation standards, longtime readers of “The Appraisal of Real Estate” will notice these significant changes in this edition:

  • New chapters focused on applications of market analysis and highest and best use analysis;
  • Additional emphasis on identifying the property rights to be appraised in an appraisal assignment; and
  • Deeper discussion of accepted techniques for allocating value among real estate, personal property and non-realty items.

In this book, readers will notice the expanded discussion of market analysis and highest and best use, with new chapters clarifying these important concepts and demonstrating procedures for their application. Readers will also notice the relationship between market analysis and highest and best use is made explicit and described in a step-by-step analytic procedure. Lastly, the major development in this new edition is the emphasis on the necessity of definitively describing the property rights to be appraised in an appraisal assignment to ensure that all the necessary steps are taken to produce a credible value conclusion.

Order your copy today!

NATIONAL SUICIDE PREVENTION MONTH

September is National Suicide Prevention Month.  Albeit, we should all do all we can to help people we are concerned about throughout the year.  Every day.   Never stop.  Never give up.

This one hits home for me.  Next month on my birthday October 15th it will be the 30th anniversary of my dad committing suicide.  He obviously chose my birthday so I would always remember it.  As if I wouldn’t remember any other date he would have done it on!

I understand the genetics of Depression and, as expected, I couldn’t avoid the power of the genes.  It’s about 16 years now that the daily fight has gone on.  At least it is still going on, eh:)

If you or anyone you know suffer from Depression, or any other Mental Illness, (say it out loud over and over until you get used to saying it….just like saying cancer or diabetes….it’s just a disease like any other….it is not something to be ignored and swept under the rug as we have done forever), please call 1-800-273-8255, seek professional help, and keep talking.

Promote National Suicide Prevention Month

You, or the person you know, are here to make a difference in the life of one or more people.  You need to stay here.  You will make a difference!

Godspeed to all.

As a reminder, please go to YouTube and listen to Morgan Wade’s The Night.  I listen to it most every day.  Great lyrics.

The Mann

 

WELCOME SOUTH DAKOTA TO THE EVALUATION WORLD

JUNE 29, 2020 – South Dakota has become the 11th state to allow licensed/certified appraisers to perform non-USPAP Evaluations.  We have 39 more to go:)  When we get back to in-person classes, if you are in a state that allows non-USPAP Evaluations, I have a 7-hour seminar on Evaluations and Validations that I will gladly come and teach.  I don’t teach over the web.  I can only share my 28 years of experience with Evaluations in person.  The Appraisal institute’s news item on this follows:

South Dakota Passes Legislation Allowing Appraisers to Perform Evaluations

South Dakota Gov. Kristi Noem on March 4 signed HB 1127, legislation that allows appraisers to provide real property evaluations to federally regulated financial institutions. When the law takes effect July 1, the state will join at least 10 others that allow appraisers to provide evaluation services. Several other states are considering similar laws.
Evaluations provided by appraisers must conform to Interagency Appraisal and Evaluation Guidelines. South Dakota’s secretary of the Department of Labor and Regulation will be authorized to promulgate rules relating to “exemptions and standards allowing appraisers to perform an evaluation for a federally insured depository institution.”
==========================================
Everyone stay safe.
The Mann