“Appraisal is market analysis!” is the title of a 1975 journal article by Richard Ratcliff, MAI.
Freddie Mac Chief Appraiser Scott Reuter recently noted pervasive market analysis deficiencies in appraisal opinions. Specifically, discrepancies from actual contract prices. For appraisers, this disparity is easily accounted for by two reasons:
- Failure to implement time adjustments to the date of value.
- Fear of being sued as the market changes direction.
Lenders are admonished for failure to “provide positive and consistent feedback that reinforces the importance of accurate market conditions analysis. It is truly the backbone of the appraisal and when developed properly results in analysis that is consistent and defendable across any level or review.”
We note that this reflects a year or more of rapid price increases prior to the middle of 2021. We also note that this strong upward trend is coming to an end, (long-term inflationary pressures aside). The failures include 1) lack of appropriate adjustment; 2) failure to extend the trend to the date of value; and 3) failure to detect and reflect the change in direction.
What this means is that industry needs to comfortably measure market velocity. Velocity is a measure of two dimensions: 1) the speed of change; and 2) change in direction.
Appraisers will be most vulnerable to being sued when the direction changes. The direction will change. It will go faster, slower, level, or downward, or fall off a cliff (like the last time, and before, and before).
The speed of change is relatively simple to quantify. In the Valuemetrics.info classes, we have been showing appraisers how to do that for nearly 20 years. But clients/lenders have not asked for it, do not expect it, and perhaps do not understand its simplicity. And usefulness.
The Market Price Index (MPI)© model is simple, market-focused, and enables velocity: trend and change in trend.
Scott Reuter suggested certain methods. We find these types of algorithms to be simple, accurate, and easy to understand. (Some learning is required). These involve:
- Relevant evidence (data) – get the right data set, the Competitive Market Segment (CMS)©.
- Correct logic (analysis) – apply the simplest model for understandable bulletproof results.
Suggested methods comprise: market inventory, listing price trends, ratios of list-price-to-sale-prices, and market-times trend. Most importantly, the use of a visually validated scatterplot and regression trend line – assures the most relevant, most useful, client advancing risk analysis result.
Best of all, the complete process, once learned, can be downloaded from MLS (or other source), and applied from beginning to end (report paste) in a matter of minutes. (Typically 2-3 minutes.)