One approach would be to identify sales of competitive properties over the past 90 days. This will give you an idea of the gross sales velocity or absorption rate. The number of current listings divided by the absorption rate will give you an idea of the supply (in months) of competitive properties.

By contrasting absorption rates to trends in supply, pricing, interest rates, employment and other economic indicators, you'll get a measure of the markets direction and can compare that to your benchmark to see if rates are declining, stable or increasing.

Comparing average prices, sales to list ratios, marketing times, etc. for properties in the market, sub-market and neighborhood will add support for the trends and how the subject or neighborhood compares to the sub-market or overall market. Providing a matrix of the data makes it easy for the reader to follow and accept your logic.

Remember to consider "un-sellable price points". If listings are significantly "over-priced" do they really represent competitive inventory? In some markets, much of the supply is over-priced. How does that impact the market and the subject property? Something I think should be addressed in the comments area.

Many MLS systems have a "Search Criteria and Statistics" or "CMA" feature that will produce a report that includes the data shown in the sample chart above. Use the "saved search" function to set up searches (geographically) for the market area, sub-market areas and neighborhoods. This way you only have to change the criteria for the subject property and once the first search is complete, simply change from the market to sub-market or neighborhood since the other factors are the same.

The key is to understand the market environment for the subject property by contrasting the trends. What are the trends and how do those trends relate to and impact the value opinion for the subject property?

Competitive Price Trends

In cases where the subject property or neighborhood is stable or increasing as compared to a sub-market or market area that is declining, you can take it one step further and graph the proof using data of directly competitive properties over a several year period. Once again, the key is to document the findings.

Summary of Trends – Market Area, Neighborhood, Subject Property

Lenders are required by FNMA to consider trends at the "metropolitan area level" via Case-Shiller, OFHEO or NAR indexes. Appraisers on the other hand, have to report trends at all levels and the impact on the subject property. Can they be different? Yes they can.

Constructing a grid shows the reader that you have considered trends at all levels and the impact on the subject property. The grid is simple to construct and all you need to do is to select the applicable area and trend.

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Comments & Conclusions

In the "Comments" area you can summarize your observations and points. Use it to remind the reader that per FNMA:

"It's the appraisers assignment to evaluate the property and provide the client with a value opinion that is supported by factual data, included within the report itself and it’s the lender's task to evaluate the property and to appropriately underwrite the risk".

Closing Thoughts

Using a housing market addendum to organize your analysis is a process that can be completed by any appraiser with basic word-processing and spreadsheet skills. The addendum makes it easy for the client to follow your logic and documents your observations in the report.

For those that might think this type of addendum is over-kill or isn't required as part of the appraisal process, I refer you to one of my favorite books.

From The Appraisal of Real Estate:

"The market analysis component of an appraisal must specifically relate market conditions to the property under investigation. It must show how the interaction of supply and demand affects the value of the subject property".

Housing market analysis if fundamental to the appraisal process. Analysis of the market and support for your conclusions are required.

From FNMA: "We require the appraiser's comments to be stated in specific, factual terms that are supported by the information included in the appraisal report".

Under any market conditions and especially in difficult market environments, your conclusions require supporting documentation. The housing market analysis addendum makes the process efficient and communicates your observations in a manner that is easily understood by the client.

Author's Note: At a la mode's Regional Convention in Las Vegas (April 12-14, 2008) I will be presenting a Housing Market Analysis class that will cover market analysis and development of the HMA addendum. The class will include a workbook and CD with samples and worksheets. Hope to see you there.

In the next installment of Outside the Boxes, I'll get back to Developing and Communicating the URAR with "Exposing Yourself … The URAR and Liability Issues".