Adding value to the appraisal of the future – by Ed Pinto
August 24, 2015 – Ed Pinto of the American Enterprise Institute was a closing speaker at the Appraisal Institute’s national conference in Dallas a few weeks ago. One of the new items he presented is summarized below. As the title suggests, the idea is to make the appraisal of the future value-added – instead of simply providing Market Price as has been the case for the past 80 years. The primary focus of Ed’s comments is residential appraising.
His ideas follow. I will not add any commentary. Just sharing the perspective from an independent party that is in contact with FHA, FNMA, Freddie Mac, etc – Ed was a prominent FNMA employee in the 1980s.
–Market cycle history*
- Create and review 10-year nominal and real home price trend to determine current position in market cycle relative to equilibrium
- If the real price trend currently at equilibrium, robust comparable sales approach is likely appropriate.
- If the real price trend currently elevated or depressed, the lesser of investment and replacement cost approaches is likely appropriate.
–History of buyer’s (>6 mo.) and or seller’s market (<=6 mo.) for existing homes**
- Determine whether a buyer’s or seller’s market based on months of home inventory divided by listings/sales rate; determine whether a buyer’s or seller’s market
- If real prices are increasing, it is almost certain that a seller’s market is present
- Market disequilibrium more likely the longer an uninterrupted seller’s market continues
–Buying power due to change in power leverage**
- AEI’s Center on Housing Risk plans to incorporate into its Mortgage Risk Index by year end
–Land value and change in land share trends**
- Calculate land value by extraction using exchange value minus replacement cost
–Whether real price change due to leverage growth or improving utility or a mix
- Evaluate role played by income leverage vs. fundamentals (i.e. job & real income growth)
*For the MSA, the subject property’s market area and price tier,(zip code or below), and the subject property
**For the MSA and the subject property’s market area and price tier (zip code or below)
“Brief History of Valuation –
Price versus Value”
August 16, 2015 – My second White Paper in an ongoing series has been uploaded to the Articles web page. You can go to the link to download the PDF file.
As always, comments are welcome. Send to GeorgeRMann@Aol.Com
The Mann Leads; The Appraisal Institute Follows
August 13, 2015 – For those of you that are members of the Appraisal Institute, you received an email today from the AI about their proposed Guide Note 15 about Assumptions and Hypothetical Conditions. Of course, the ASB already covers Extraordinary Assumptions and Hypothetical Conditions in great detail and have for maybe a decade or more. As usual, the AI is wasting time on issues that have been solved instead of focusing on issues that need to be solved – which the APB has been doing.
But, this is more about the Appraisal Institute finally catching on to what me and others have been proposing for years – stop using the words appraiser, appraisal, etc – that industry is on its death bed. In our (authored by myself and Eric Moskau) first White Paper titled ‘The Appraiser Wore No Clothes’ (released March 2015….email me at GeorgeRMann@Aol.Com if you want a copy) we mentioned the terms Valuation Analyst, Valuist, and Valuistics (David Braun contributed some of these terms).
When you read the proposed AI Guide Note it should stand out as to the number of times they refer to ‘appraisers’ – ZERO! Instead they use the term ‘valuer’ numerous times throughout the document. Maybe a name change is in the cards – The Valuer Institute:)
It is nice just to see the AI start to realize a radical change is needed. I am not sure if using the term ‘valuer’ is a paradigm shift, but we shall see. Due to an organization’s size and politics, it will be slow to move. But, if it will follow The Mann and others to a new industry it will at least be moving in the right direction.
One last note….last Sunday, August 9, 2015 was the 25th Anniversary of FIRREA becoming effective!!! I hope everyone had a huge party and celebrated the occasion:)
As the internet has become a way to remember things forever, I want to memorialize my dog Hope who passed away on Monday – February 1, 2002 to August 10, 2015. R.I.P. Hope
The 2nd Housing Bubble of the 21st Century is well underway
July 29, 2015 – I just finished attending the Appraisal Institute’s AI Connect national conference in Dallas. Thankfully, these are inside as it has been 100+ degrees outside all week.
Ed Pinto of the American Enterprise Institute ended the conference with a great presentation that addressed the current status of the housing market. Some highlights follow:
From 9/1993 to 1/2006 housing was in a Seller’s Market, as defined by NAR, for 140 out of the 152 months. Not too many things that NAR puts out are worthwhile, but in this case, their definition of a Buyer’s and Seller’s Market has been very accurate for many decades. The 1/2006 end of the Seller’s Market ended with a streak of 99 consecutive months. Housing prices quickly tanked when the monthly supply of houses for sale changed to a Buyer’s Market.
Although we had a significant decline in home prices, we never did get below, or much below, the long-term average price of housing. i.e. house prices never did become a bargain like a normal bear market would entail. As the government did in the early 2000s, it implemented policies that stopped the decline before it could run its course. Thus, this second false bull market in house prices has occurred.
According to NAR, the current Seller’s Market is now 34 months old. Home prices in some markets are back to record highs. In fact, NAR just reported that the national home price average just hit a record high. The government has succeeded at re-inflating the market and getting nominal home prices back to high levels so the general public will think everything is fine again.
Since income for the general population is not increasing, the government will need to pull some strings to increase buying capacity to keep nominal home prices going up. Thus, you can be sure that leverage will continue to increase right thru the next peak in prices and for awhile into the next bear market. We will make sure people buy overpriced houses with record leverage so they can once again incur significant losses when the downturn occurs. That’s The American Dream apparently.
This top does not, and likely will not, be as extreme as the 2006 top. The 1937 downturn occurred from a much lower level than the 1929 top. But, a top is forming. The difficulty with tops in financial markets (my next white paper will show why residential real estate is a financial market and no longer an economic market) is they can take years to form. Bottoms in financial markets are very easy to call as they are usually ‘V-shaped.’
An interesting item Ed mentioned was about seller concessions – a topic that I am hearing about almost daily for some reason. Anyway….when seller concessions are above 3% up to 6%, default rates are 90% higher than when there are no seller concessions. Yikes!
A second interesting item he mentioned was from the FHFA. Their record of home prices going back to 1975 shows that the REAL (not nominal) rate of return on home prices has been an anemic 0.35% per year. This is in agreement with Shiller’s finding that real home prices have not changed since 1890.
As I have been telling people since I was a teenager, other than a car, the WORST investment you can make is buying a house. If prices aren’t going up, think how much you are really losing on a house. Sales commission at the end of your holding period. Maintenance, utilities, insurance, real estate taxes while you live in it. The biggest expense – mortgage interest. Even with the tax deduction, 70%+ of the mortgage interest is still an expense. No wonder in Germany 50% of the houses over $1MM are rentals! Some rich people have figured this out and realize the advantage of renting.
That’s it for now….I wanted to get my very first post out to the Mann Overboard blog. The Reviewer’s Tips blog has 2 posts to date. For now, if you have any comments, email me directly at GeorgeRMann@Aol.Com.
I will post when my 2nd White Paper is uploaded to this website…..soon hopefully.