Market Action and Reaction
I believe it is time that we take a practical look at what a subject’s market is…
Drawing on part of my heritage, the Native American Cherokee part, “Many Moons Ago” when I was employed as a Management Consultant/District Director for a Century 21 Franchisor, one of the challenges that I faced in dealing with over 50 separate brokerages was helping these often small brokerages define their markets.
There was a theory that someone had come up with that it was about a 3 mile radius around their office. Well, in some cases that would have put some markets in the Chesapeake Bay or the Atlantic Ocean, or even more likely, on a military base. In my efforts to help the brokers understand, I would have them put up a large street map. Then have them locate where individual agents lived. Next step, put up a pin or marker where their listings and pending sales were located. More often than not, “market” activity would be clustered near where their agents lived.
The secondary market, Fannie Mae and all the little mae’s seem to believe that a market is comprised of a neighborhood. That must be the case since everything, reports, the 1004MC all relate to neighborhood activity. To some degree that may be the case, but it is becoming less and less true. Not only should our concept of a market change, so should the boundary lines of that market.
Market is the entire county…
In one County in North Carolina where I do appraisals, there is not even a town, just place names. And, although there are some named neighborhoods, the market is the entire county and often parts of the adjoining county. Market activity, wages, employment, housing cost, amenities, and a host of other reasons help define a market. Which leads me to another aspect of a “Market”. That has to do with understanding or reading a market.
I was recently asked by an Underwriter to put into a report… ”why” the market did certain things. My reply was that I did not have the qualifications to be able to define the collective thinking of a market. As Judge Judy would say, “that calls for knowing the operation of ones mind”, something I certainly am not qualified to do. I can tell you what a market has done by looking at the evidence. I cannot tell you “why” the market has done what it has done. It is likely that not even a Phd Behavioral Scientist could tell us that. Sometimes there is no logical reason for a market reaction. But, it is a reaction none the less. Take for example, an appraisal I did several years ago. A Ranch style property where there were 4 model match sales within a mile of the subject. Problem was, one of the sales was for $8,000 more than the other sales. There seemed to be no apparent reason for the difference. But, the subject had been listed at the higher amount, exact same amount as the higher sale. My opinion reflected a market reaction and value similar to the lower sales prices. That was challenged by the listing agent and buyer who asked for a reconsideration of value.
Why did you pay so much more for this house…
In doing the reconsideration of value I simply could find no logical reason why that single property had sold for $8,000 more than 3 other sales. So, I went to that property, knocked on the door, and asked point blank of the new owner… ”why did you pay so much more for this house than 3 sales that were just like it”? At first he was taken back somewhat. Then he finally admitted… ”Because my wife likes it here”. Seems it provided a more direct access for his wife to exit the neighborhood and quickly get to her mothers house. I would have never figured that out by studying the market.
So, finally, I can tell you what the market does or has done. I cannot tell you why.
It does seem rather odd, looking back over 45 years in the real estate and appraisals business, that we are still struggling with a definition of what a market is. When I first got into the real estate business I was told that in terms of real estate value there are 3 important things… ”Location, Location, Location.” That is still true for the most part. But, with ever evolving changes in Urban, Suburban and Rural areas, with new subdivisions springing up in the middle of farm land, and old housing being torn down and replaced with new or “almost new” construction, that there are many areas with markets within a market, or, stated another way, a residential neighborhood on which the secondary market places so much weight, there may be 1, 2, 3 or even more “markets” within the same neighborhood. I have several of those in my market area. Homes built in the early 1900’s, some in almost original, run down condition, some that have been extensively rehabilitated and updated, and some that are new construction on a site where a previous property was torn down.
I believe it is time that we take a practical look at what a subject’s market is… a place where buyers and sellers compete, not necessarily a place name.
“Happy Appraising”
- Market Action and Reaction - June 27, 2016
- Real Estate Appraisers…Who Are We? - January 28, 2016
- Appraisal Standards Should Age Like Fine Wine - January 19, 2016
When a single individual buyer ponies up cash over MV, they set the stage for everyone else to follow. The appraisal theoretical question which remains unanswered is how many instances of such higher purchase record legitimately sets the market for everyone else purchasing and selling, and all the inevitable refinances which follow. Buyers and sellers set the market. You can’t quantify inept agency, or fast and loose purchasing activity. The err in thinking is that we presume buyers and sellers will correct the market via price, negotiation, non acceptance of available rising price listings, etc. The truth is people are struggling and competing for housing nationally with every motivation possible. The consumer base is extended too much credit and have shown a verifiable track record they may not or will not be capable of price self correction through variable purchasing restraint. In the end market correction happens because all bubbles must pop. Entire regional markets are inevitably intertwined by way of commonality of 98% LTV credit availability as that relates to availability of income and housing quantity. Please don’t ask me what that measurement is, I don’t know. If we want stable markets as a group we need more equity, less credit, and more stringent borrowing criteria. Like don’t just bring it back to 80/20, move all GSE lending to 60/40 max LTV requirement, and watch borrowers suddenly care about how much they’re borrowing. People willingly borrow to the moon without reservation. Ask them to furnish that in cash, and you get an entirely different sort of attention to caution and the benefit of price correction. Per the article, the one guy paid $8k over, and the market moved upward as a result. The duty of advocacy based agency requires the next listing agent to try and follow that. When buyers are extended credit freely, they will fail to correct the market. Appraisers are supposed to be that stopgap, but with 98% LTV available everywhere, we usually cannot predict or position ourselves to say the buyers market will not follow. If a buyer has to compete with even one other buyer, throw caution out the window and presume the higher price will prevail.
Not to worry Charles the AMC’s will tell us exactly what they want. The neighborhood section will always match the MC form, right? Or you can just take the agents word for it as they always correctly identify the neighborhood (?). Heck, the easiest way per our government and their CU platform is to just use the census track for every property. Don’t forget of course the AMCs want a farm list of addresses that were within your neighborhood search boundaries, that you did not use. Good luck defining a large neighborhood (zip code, city, county) and giving the AMC a list of 500+ properties that they could use against you. The system is broken as many appraisers define the market area just inside the furthest location of their comparable. They tell me why define the neighborhood and include hundreds of properties that the lender and AMC could use against them, when the comps come from within the immediate PUD (a few streets). Why define a large market area when that condo property has data from a few blocks away? What we do today is defensive appraising where it seems they are more concerned with what we didn’t do (please look at these 5 additional sales) as compared to what we did do.
Bill, just helpful FYI. I’ve found success in posting my final research set within the report, with accompanying 90 day segment and larger less filtered segment. Usually takes 1 or 2 addenda pages to explain, and 1-5 variable upload pages to present. But then all those properties to be possibly reconsidered are already plastered in the report and you’ve proved you’ve already at least considered those wide ranges of data. Takes the wind out of those comp reconsideration requests nearly every time. Just post the final research data within the report. I like 1 line presentations w/ key features, and usually MLS will have some sort of brief 1 liner presentation that is easy to copy paste or download upload into reports.
Great article Charles!
A neighborhood can be bound by geographical obstructions, economic, governmental & tax districts as well as property designs or types and uses. It really boils down to the principle of substitution. If a buyer can’t have this one, what else would he consider?
In my area, a neighborhood can be school districts. In other cases, it’s a specific exclusive subdivision. It can also be all water front properties regardless of the county or school district. People who can afford a water front home don’t really care about the schools as they can afford private education.
In commercial, it can be the city, county, state or a whole region.
From: The Appraisal of Real Estate – Twelfth Edition – Appraisal Institute
Neighborhood Bounderies: See Market Area Addendum
**Market Area Addendum**
The defined geographic area in which the subject property competes for the attentions of market participants; the term broadly defines an area containing diverse land uses.
Social, economic, governmental, and environmental forces influence property values in the vicinity of a subject property. As a result, they affect the value of the subject property. Therefore, to conduct a thorough analysis, the appraiser must delineate the boundaries of the area of influence. Although physical boundaries may be drawn, the most important boundaries are those that identify factors influencing property values.
The area of influence, commonly called a neighborhood, can be defined as a group of complementary land uses. A residential neighborhood, for example, may contain single-family homes and commercial properties that provide services for local residents. A district, on the other hand, has one predominant land use. Districts are commonly composed of apartments or commercial, industrial, or agricultural properties. In broader terms, appraisers analyze the market area for the attentions of buyers and sellers in the real estate market. A market area can encompass one or more neighborhoods and/or districts.
The term market area may be more useful than either neighborhood or district for several reasons:
Using the umbrella term market area avoids the confusing and negative implications of the other terms.
**A market area can include neighborhoods, districts, and combinations of both.**
Understanding how real estate markets work is essential in almost every step of the valuation process. The term market area – more than the terms neighborhood and district – refers to an area where market participants live and work. The term also refers to areas on which appraisers focus when analyzing value influences.