Macro and Micro Data Sources in Real Estate Appraisal

Chapter: Macro and Micro Data Sources in Real Estate Appraisal

Introduction

Real estate appraisal relies heavily on data to support value conclusions. This chapter explores the crucial role of both macro and micro data sources in the appraisal process. Macro data provides a broad overview of economic and market conditions, while micro data focuses on specific property characteristics and transactions. Understanding and effectively utilizing both types of data is essential for producing credible and well-supported appraisal reports. Organizing, summarizing, and describing large quantities of data is required to remain competitive in the current marketplace.

1. Macro-Level Data Sources

Macro-level data encompasses information about the overall economy, real estate market trends, and demographic characteristics of a region or area. This data helps appraisers understand the broader context in which a property is situated and how external factors might influence its value.

• Definition: Macro data provides a broad perspective on economic, social, and governmental forces impacting real estate values.

• Importance:

  • Identifies trends in supply and demand.
  • Helps to understand economic drivers affecting property values.
  • Provides support for adjustments in the sales comparison approach.
  • Ensures the appraisal reflects current market conditions.

• Common Sources:

  1. Government Agencies:
     • Council of Economic Advisors: Publication The Economic Report of the President provides information on the labor force, employment, industrial production, tax policy, technology, government regulation, and income (www.whitehouse.gov/wp-content/uploads/2019/03/ERP-2019.pdf).
     • Federal Reserve Board: The Federal Reserve Bulletin offers data on gross national product, gross domestic product, national income, mortgage markets, interest rates, installment credit, sources of funds, business activity, labor force, employment, industrial production, housing and construction, and international finance (www.federalreserve.gov/publications.htm).
     • Federal Housing Finance Agency (FHFA): Provides information on residential market conditions (www.fhfa.gov).
     • National Vital Statistics System: Publications National Vital Statistics Reports provide statistics on birth and death rates (www.cdc.gov/nchs/nvss/index.htm).
     • U.S. Department of Commerce, Census Bureau: Offers a wide range of data including current population, population estimates and projections, consumer income, housing completions, housing permits, other housing statistics, and operational and performance data for American businesses (www.census.gov/library/publications/time-series.html).
     • U.S. Department of Commerce, Bureau of Economic Analysis: Publication Survey of Current Business provides information on the Consumer Price Index, Wholesale Price Index, data on mortgage debt and the value of new construction (https://apps.bea.gov/scb/index.htm).
     • U.S. Department of Housing and Urban Development (HUD): Offers reports on FHA building starts, financing, housing programs, and vacancy surveys for selected metropolitan areas (www.hud.gov).
     • U.S. Department of Labor, Bureau of Labor Statistics (BLS): The Monthly Labor Review provides the Consumer Price Index, Wholesale prices, monthly and annual employment, and earnings figures (http://stats.bls.gov/opub/mlr/mlrhome.htm).
  2. State and Local Agencies:
     • Departments of development, local and regional planning agencies, state demographers, and regional or metropolitan transportation authorities publish directories of manufacturers (listing firm names, products, and employment figures) and other reports relating to population, households, employment, master plans, and present/future utility and transportation systems.
     • State bureaus of employment service or state bureaus of labor provide research reports on various topics, such as workforce analysis by jobs and quarterly workstats, that include county data on employment, unemployment, and wage rates.
  3. Trade Associations:
     • Chambers of commerce publish information related to local business and demographics.
     • Real estate associations such as the American Real Estate Society (ARES), the American Society of Appraisers (ASA), the Appraisal Institute, Building Owners and Managers Association (BOMA) International, The Counselors of Real Estate (CRE), the International Association of Assessing Officers (IAAO), the Mortgage Bankers Association (MBA), the National Association of Realtors (NAR), and the Urban Land Institute (ULI) provide publications with data useful to appraisers.
     • National Association of Home Builders publishes information, by county and for selected cities, on new housing starts, prices, construction costs, financing, households, income distribution, and retail sales.
  4. Private Sources:
     • Banks, utility companies, university research centers, private advisory firms, multiple listing services, and cost data services provide information on bank debt, department store sales, employment indicators, land prices, corporate business indicators, mortgage money costs, wage rates, construction costs, deeds, mortgage recordings, new land use by zoning classification, population and demographics, and housing forecasts.

• Examples of Practical Applications:

  • Economic Base Analysis: Utilizing employment data from the BLS to determine the stability and growth potential of a local economy.
  • Market Trend Analysis: Analyzing housing permit data from the Census Bureau to identify trends in new construction activity.
  • Demographic Studies: Using Census data to understand population growth, age distribution, and income levels in a specific market area.

• Mathematical Considerations:

  • Growth Rate Calculation: Calculating population or employment growth rates using the formula:

    • g = ((Value_t / Value₀)^(1/t)) - 1

      where:
      * g = growth rate
      * Value_t = value at time t
      * Value₀ = value at the initial time
      * t = number of periods

  • Absorption Rate: Analyzing the rate at which new properties are being absorbed into the market using the formula:

    • Absorption Rate = (Number of Units Sold or Leased) / (Total Number of Units Available)

2. Micro-Level Data Sources

Micro-level data focuses on specific details about the subject property and comparable properties. This includes property characteristics, transaction details, income and expense information, and other relevant factors that directly influence value.

• Definition: Micro data provides detailed information on individual properties and their specific characteristics.

• Importance:

  • Provides the basis for direct comparisons between the subject property and comparable sales.
  • Supports adjustments in the sales comparison approach based on specific property differences.
  • Forms the foundation for income capitalization analysis through detailed income and expense data.
  • Allows for accurate property descriptions and analysis of unique features.

• Common Sources:

  1. Public Records:
     • Property Deeds: Provide information on the parties involved, transaction date, legal description, and property rights transferred.
     • Tax Assessor’s Records: Include property data, land and building sketches, area measurements, sale prices, and other relevant information.
  2. Listings and Offerings:
     • Data about properties offered for sale to ascertain strength or weakness of the local market and sales activity.
     • Purchase offers to suggest a lower limit of value.
  3. Multiple Listing Services (MLS):
     • Contain data on residential properties listed for sale, including listing prices, descriptions, and broker information.
  4. Commercial Real Estate Services:
     • CBRE (www.cbre.us)
     • Colliers International (www2.colliers.com/en)
     • CoStar (www.costar.com) - Subscription basis.
     • Cushman & Wakefield (www.cushmanwakefield.com)
     • Jones Lang LaSalle (JLL) (www.us.jll.com/en)
     • LoopNet (www.loopnet.com) - Some free; some subscription based.
     • Marcus & Millichap Real Estate Investment Services (www.marcusmillichap.com)
     • NAI Global (www.naiglobal.com)
     • RealtyRates.com (www.realtyrates.com) - Some free survey data and some by subscription only.
     • Reis, Inc. (Real Estate Solutions by Moody’s Analytics) (www.reis.com) - Subscriptions for a fee. Appraisal Institute members get a discount.
     • Site to Do Business (www.stdb.com) - Different subscription levels with one free for Appraisal Institute members and a more complete use of the site for a fee.
     • Transwestern (www.transwestern.net)
  5. Personal Contacts:
     • Developers, builders, brokers, financial and legal specialists, property managers, local planners, and other real estate professionals can provide useful information.

• Examples of Practical Applications:

  • Sales Comparison Approach: Extracting detailed property characteristics from MLS listings and tax assessor records to make accurate adjustments for differences between the subject property and comparables.
  • Income Capitalization Analysis: Gathering income and expense data from property managers and owners to develop accurate projections of net operating income (NOI).
  • Cost Approach: Obtaining construction cost data from cost data services to estimate the reproduction or replacement cost of the subject property.

• Mathematical Considerations:

  • Adjustment Calculations: Quantifying adjustments for differences in property characteristics, such as size, location, or amenities.

  • Capitalization Rate Derivation: Deriving capitalization rates from comparable sales data using the formula:

    • Cap Rate = NOI / Sale Price
      • Discounted Cash Flow (DCF) Analysis: Projecting future cash flows and discounting them back to present value using a discount rate to estimate the present worth of a property.
    • PV = CF1/(1+r) + CF2/(1+r)^2 + … + CFn/(1+r)^n
      where:
      • PV is the present value of the investment
      • CF1, CF2,…, CFn are the cash flows in each period
      • r is the discount rate
      • n is the number of periods

3. Data Verification and Reliability

Regardless of the source, all data used in the appraisal process must be verified for accuracy and reliability. This involves cross-checking information from multiple sources, interviewing knowledgeable parties, and applying sound judgment to evaluate the credibility of the data.

• Importance of Verification:

  • Ensures the appraisal is based on accurate and reliable information.
  • Reduces the risk of errors and misrepresentations in the valuation process.
  • Increases the credibility of the appraisal report.

• Verification Techniques:

  • Cross-Referencing: Comparing data from multiple sources to identify inconsistencies or discrepancies.
  • Interviews: Speaking with knowledgeable parties, such as property managers, owners, or local experts, to confirm or clarify information.
  • Physical Inspection: Conducting a thorough physical inspection of the subject property and comparable properties to verify property characteristics and condition.
  • Statistical Analysis: Using statistical methods to identify outliers or unusual data points that may require further investigation.

• Addressing Data Inconsistencies:

  • Identify the Source of the Discrepancy: Determine the origin of the conflicting information.
  • Investigate Further: Conduct additional research to resolve the discrepancy.
  • Document Findings: Clearly explain the discrepancy and the steps taken to resolve it in the appraisal report.
  • Apply Professional Judgment: Use your expertise to determine the most reliable data and support your value conclusion.

4. The Impact of Technology on Data Collection

Advancements in technology have significantly transformed the way appraisers collect and analyze data. Online databases, geographic information systems (GIS), and automated valuation models (AVMs) have become increasingly prevalent, offering appraisers access to vast amounts of information and sophisticated analytical tools.

• Online Databases: Provide access to a wide range of data, including property records, market data, and demographic information.

• Geographic Information Systems (GIS): Allow appraisers to visualize and analyze spatial data, such as property locations, zoning regulations, and environmental factors.

• Automated Valuation Models (AVMs): Use statistical models to estimate property values based on available data. While AVMs can be a useful tool, it is important to understand their limitations and to always verify their results with independent analysis and professional judgment.

• Artificial intelligence (AI), blockchain databases, and automated valuation models (AVMs): Blockchain databases allow for data sharing in a decentralized “peer-to-peer” network. Advances in AI and AVMs will increase the amount of available data, the speed at which the data can be accessed, and the ways that the data can be sorted and narrowed down by specifications.

Conclusion

Mastering the use of both macro and micro data sources is critical for real estate appraisers. By understanding the broader economic and market context, and by gathering detailed information on specific properties, appraisers can develop credible and well-supported value conclusions. As technology continues to evolve, appraisers must stay informed about new data sources and analytical tools to remain competitive and provide accurate and reliable valuations. The emphasis in Standard 1 of the Uniform Standards of Professional Appraisal Practice is to “correctly complete research and analyses necessary to produce a credible appraisal.’