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.

Determine (methodology):

–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)