Post No. 35 – First off and most importantly, Happy Holidays to everyone. Be safe, enjoy some down time with family and friends, and here's to a Happy New Year!
Second, last week's post got a lot of feedback. I appreciate all of the comments - for and against. There is hardly an issue that doesn't have people for and against. Nothing different in our industry. I did want to note some feedback I got directly from a few AMCs. They liked my viewpoint and stated that their good appraisers often quoted lower fees because they knew they were going to be reviewed by peer professionals. I have experienced that myself. Over the decades I have seen the appraisers I use bid about 10%-15% lower than they would bid for competitive banks (remember reviewers usually see the work of all appraisers in an area and also of many other banks). The reason these appraisers would give me is they knew they were bidding against equally competent appraisers, my review staff was composed of former fee appraisers and thus had valid questions, we paid quickest of all companies, and we insulated them from undue pressure. It was cheaper and easier for them to do an assignment for us than it was other banks or AMCs. Again, low bids were/are provided by the best appraisers in these situations. Obviously, this is not always the case.
Third, is in regard to the article below that was posted on the Appraisal Institute's website:
Fitch: Nation’s Homes Overvalued by 17 Percent
As the nation’s home prices continue to rise, several cities are approaching bubble-level price peaks, ratings firm Fitch Ratings announced Nov. 6 in its Sustainable Home Price Model.
Home prices have risen 13 percent from a year ago, and Fitch warned that that level of growth is unsustainable. The firm reported that home prices are approximately 17 percent overvalued. Many of the cities with overvalued homes are in California.
“Home prices in San Francisco have gone up over 20 percent year-over-year, the highest rate of increase than at any point in the last 10 years,” Stefan Hilts, director at Fitch, said in a news release. “In fact, San Francisco and San Jose will set new home price records in the next six months.”
Fitch's SHP model currently identifies much of coastal California as more than 20 percent overvalued. Other California cities nearing bubble-year peaks include Oakland, San Diego and Los Angeles.
Fitch also noted that all-cash sales have seen a sharp increase since last year and now account for nearly 50 percent of deals. The ratings firm noted concern that home price increases are being driven more through speculative buying than from increasing demand.
Home prices continue to increase despite rising mortgage interest rates. Interest rates have continued to rise since May, and Fitch said it expects interest rates to increase further in 2014, which will strain affordability if home prices remain elevated.
The concept I, and others, propose is that when the above is occurring the current sales prices need to be adjusted downward for Conditions of Sale - i.e. buyers are not being prudent and thus the market value definition conditions are not being met. As a generalization (and this is simply a huge generalization for discussion purposes), appraisers would adjust current sale prices down by about 17%.
Some, or likely many(!), would argue with doing this. However, this is the same logic that the world demands regarding 'foreclosure' sales during market declines. In those cases, the argument is made that the seller is not being prudent and thus the definition of market value is not being met with those sales.
And there we have the same argument at the top and bottom. However, people only want positive adjustments to sales at the bottom and not downward adjustments to the sales at the top. The appraisal industry has obliged for the past 80 years. It is time to change and adjust the sale prices in overpriced markets downward or not use the sales comparison approach at all.
Lastly, and somewhat related to the above concept, I am excited that tomorrow (Monday December 16th) will be the launch of the AEI's International Center on Housing Risk (ICHR). The ICHR will be presenting newly developed risk indices on housing markets in various countries - maybe even somewhat localized indices over time. I will definitely be discussing this new development throughout 2014.
Until next year,
Ban The Sales Comparison Approach!
George R. Mann, CRE, FRICS, MAI
"The postings on this site are my own and do not necessarily reflect the views of Situs."