State of the Appraisal Profession & Residential Market Overview
In March, I once again traveled to Modesto, CA, and attended the Annual Spring Conference of the Appraisal Institute’s Northern California Chapter. This month, I will share some useful and interesting information from the presentations. The conference focuses on the California market, but many of the presenters also covered topics related to the national market.
The first session was “State of the Appraisal Profession”; the speaker was Lance Coyle, MAI, and SRA who is national president-elect of the Appraisal Institute. He started by giving a brief history of the profession and pointed out that significant changes came to the profession with the Financial Institutions Recovery and Enforcement Act (FIRREA) in 1989. This ushered in the licensing of appraisers for the first time. Not a bad thing for the profession, but a real game changer for appraiser organizations. Prior to licensing, it was very important for an appraiser to have a designation, but afterward the license became the standard measure of competence. Memberships in the Appraisal Institute dropped for many years afterward, but have seen a recent resurgence. Coyle pointed out that designations are once again carrying weight with some clients and that designated appraisers tend to earn more money overall.
Coyle then discussed the current decline in the appraiser population nationwide. The number of licensed and certified appraisers in the country has dropped from a high of nearly 100,000 in 2007 to 81,000 in 2013. That’s a big drop, but even more disturbing is the age of many of those still left. The median age of MAIs and SRAs is 60 and 61 years respectively. Younger people no longer see appraising as a viable career and can’t or don’t want to go through the internship process.
In addition to the challenge of attracting new appraisers to the profession, Coyle also sees a changing regulatory environment as a challenge for both current appraisers and those who may want to enter the field. The Dodd-Frank Act and other regulatory changes have caused challenges for the appraisers and increased their liability. The commoditization of the appraisal itself has become another big problem. These days, lenders and the GSEs want everything to look pretty much the same. As appraisals become more generic, it actually puts downward pressure on prices.
The Appraisal Institute is working to counter these challenges and has a number of new initiatives they think will help. These include a new candidate program, new review designations, alternate standards, and expanded education delivery. Coyle also mentioned that another important factor is the cutting edge advances in the body of appraisal knowledge, such as the use of statistical analysis and large data sets, different approaches to market analysis, refinements of the cost approach, and the appraisal of real estate damage and green improvements. To find out more about these initiatives, contact the Appraisal Institute directly or visit their website at http://www.appraisalinstitute.org/.
The second session I will cover is the “Residential Market Overview”. The first speaker was Glenn Race, CRB, CRS, GRI. Race is with Prudential California Realty and presented a lot of interesting information about what happened with the real estate market in 2013 and also predictions about what will happen in 2014 and beyond.
As we all know, in 2013 historic low interest rates fueled demand and in many areas things changed from a buyer’s market to a seller’s market as prices spiked up as much as 35%. On average 72% of sellers received multiple offers. However, financing became much stricter and 38% of the deals fell through at least once. Many areas also saw a lot of cash-sale investor activity, which has tapered off into 2014.
Who will be the main buyers in 2014 and beyond? Race is betting heavily on the “millennials.” Over 80 million people fall into this group and they will now be looking to buy. In fact, many are interested in buying real estate for an investment. Race related a story where a “millennial” in his office had actually purchased six investment properties even before buying one to live in! Another group looking to purchase property will be the “baby boomer boomerang buyers.” These are the boomers who owned property in the past and lost it in the recession. Many are back on their feet now and will be looking to get back into real estate ownership. Immigrants, more blended families looking for bigger houses, and basic move-up buyers will also all be factors driving future sales.
Race further described some of the market trends we will see in 2014 and beyond. First, we will see mortgage rates continue to rise. More inventory will be available and prices should continue to increase slowly. Credit and lending requirements should ease up a bit and the adjustable loan will gain back a bit of the market. Of course, he said a full real estate market recovery depends on one major factor – a healthy job market. Race believes housing recovery will follow economic recovery as the government focuses on creating good paying full-time jobs.
The final speaker was John Beckman, president of the local Building Industry Association. He explained that building and construction has always been cyclical, seeing many peaks and valleys over time. Looking back at the overall trend from the ’50s to the present, the best years for building were between 1972 and 2005. Since that time, the drop has been unprecedented and the overall trend line has dropped lower than ever. There are some signs of recovery now and construction is back to representing about 15% of the GDP. Beckman explained that when construction is going strong, it represents about 20% of the GDP.
Beckman believes we will continue to see sales activity in the residential market. He listed the top five reasons people buy homes: wanting a better home (14.8%), establish own “new” household (10.4%), job transfer (9.1%), wanted a cheaper house (8.3%), and wanted to own instead of renting (5.8%).
Most of these potential buyers (82%) want to purchase a detached SFR. However, Beckman explained that there are some possible issues that could hamper potential home buyers. Rising mortgage rates and home prices are making property less affordable and growing student loan debt may make it difficult for some buyers to qualify.
Overall, I think these presentations gave the attendees a good view of where the residential market is headed. Housing sales are still facing some headwinds like slow job growth, rising interest rates, and rising prices. However, all the speakers are feeling optimistic about residential sales activity in the next few years. Factors, like an improving economy, easing credit requirements, and many potential buyers now looking to make a home purchase may be enough to keep the market moving in the right direction.