Market Trends and Data Collection for Appraisal

Chapter [Chapter Number]: Market Trends and Data Collection for Appraisal

Introduction

This chapter delves into the critical aspects of market trend analysis and data collection, essential components of a robust real estate appraisal. A sound understanding of market dynamics and the ability to gather and interpret relevant data are paramount for developing credible and defensible value opinions. We will explore various data sources, analytical techniques, and potential pitfalls to ensure appraisals are based on accurate and reliable information.

1. Understanding Market Trends

Market trends represent the direction and magnitude of change in real estate market variables over time. Identifying and interpreting these trends is crucial for understanding current market conditions and forecasting future values. These trends are influenced by a complex interplay of economic, demographic, governmental, and social factors.

1.1 Economic Factors

Economic conditions are powerful drivers of real estate markets. Key indicators include:

*   Employment Levels: Job growth typically fuels demand for housing and commercial space, while job losses dampen demand. An increase in employment in a market will bring new employees and a need for housing. With high demand and stable supply, prices should rise in the short run.
*   Interest Rates: Lower interest rates make borrowing more affordable, increasing purchasing power and stimulating demand. Conversely, higher rates can slow down market activity.
*   Gross Domestic Product (GDP): Overall economic growth, as measured by GDP, provides a broad indicator of market health.
*   Inflation: Rising inflation can erode purchasing power and impact real estate values.
*   Consumer Confidence: Consumer sentiment influences spending and investment decisions, affecting demand for real estate.

Equation 1.1: Real Interest Rate
r = i - π

Where:
r = Real interest rate
i = Nominal interest rate
π = Inflation rate

Practical Application:
Consider a scenario where the nominal interest rate on mortgages is 6% and the inflation rate is 3%. The real interest rate is 3%, which could encourage more people to invest in real estate due to lower borrowing costs.

1.2 Demographic Factors

Demographics, the statistical characteristics of a population, significantly impact real estate demand and supply. Key demographic trends include:

*   Population Growth: An increasing population generally leads to higher demand for housing and other types of real estate.
*   Household Formation: The rate at which new households are formed influences the demand for housing units.
*   Age Distribution: Different age groups have different housing needs and preferences (e.g., young adults may prefer apartments, while families may seek single-family homes).
*   Migration Patterns: The movement of people into or out of a region affects housing demand and supply.
*   Household Income: Income levels influence the affordability of housing and the type of properties people can afford.

Practical Application:
A growing city with a large influx of young professionals may experience increased demand for rental apartments and condominiums in urban areas.

1.3 Governmental Factors

Government policies and regulations exert a substantial influence on real estate markets. Key governmental factors include:

*   Zoning Regulations: Zoning laws dictate land use and density, impacting the type and amount of development that can occur. Areas with high demand may be zoned in a way that precludes development. The areas with the most land use controls often have the highest demand.
*   Building Codes: Building codes set standards for construction quality and safety, influencing the cost and type of buildings.
*   Property Taxes: Property taxes affect the cost of ownership and can influence property values. States, counties, townships, cities, and towns usually levy taxes based on the following year's budgets for various agencies and departments.
*   Government Subsidies: Subsidies for housing or development can stimulate market activity.
*   Environmental Regulations: Environmental regulations can restrict development and impact property values.
*   Economic Policies: The economic policies of state government can also affect real estate values. One state may raise property taxes or business taxes higher than an adjacent state and cause some business owners along the borders to move in one direction or the other. One state may have a personal property tax and another may not, which can coax manufacturers to move.

Practical Application:
Relaxed zoning regulations in a previously restricted area could lead to a surge in new construction and increased property values in that area.

1.4 Social Factors

Social trends and preferences also play a role in shaping real estate markets. Key social factors include:

*   <a data-bs-toggle="modal" data-bs-target="#questionModal-106741" role="button" aria-label="Open Question" class="keyword-wrapper question-trigger"><span class="keyword-container"><a data-bs-toggle="modal" data-bs-target="#questionModal-376556" role="button" aria-label="Open Question" class="keyword-wrapper question-trigger"><span class="keyword-container">lifestyle preferences</span><span class="flag-trigger">❓</span></a></span><span class="flag-trigger">❓</span></a>: Changing lifestyle preferences (e.g., a desire for urban living, walkable neighborhoods) influence demand for certain types of properties.
*   Consumer Tastes: Consumer preferences for certain architectural styles, amenities, or locations affect property values.
*   Social Norms: Social norms and attitudes towards homeownership, renting, or co-living can influence market dynamics.
*   Demographics: Demographic trends are just as important as economic trends in the analysis of real estate supply and demand, especially in the appraisal of proposed properties when there is no occupancy history.

Practical Application:
A growing trend towards sustainable living could increase demand for energy-efficient homes and green buildings.

2. Data Collection for Appraisal

Accurate and reliable data is the foundation of a credible appraisal. appraisers must❓ gather and verify data from various sources to support their analysis and value conclusions. Insufficient diligence in collecting data and the collection of incorrect data are common reasons for complaints against appraisers.

2.1 Types of Data

Real estate data can be broadly categorized into two types:

*   Macro-Level Data: Macro-level data describes broad economic, demographic, governmental, and social trends that affect the overall real estate market. This includes data on population changes, job gains or losses, unemployment, and resale property price trends.
*   Micro-Level Data: Micro-level data (also sometimes known as specific data) includes data on the subject property, comparable sales, leases, and other market phenomena.

2.2 Data Sources

Appraisers utilize a wide range of data sources, including:

1. Multiple Listing Services (MLS): MLS systems provide listing and sales data for residential, condominium, and small multifamily properties. An MLS system can also provide a historical sales rate for similar properties to illustrate demand. Multiple listing service (MLS) systems can provide a list of current listings for one-unit residential, condominium, and small multifamily properties.
    Equation 2.1: Months of Supply
    Months of Supply = Current Listings / (Sales per Month)
    14/(65/12) = 2.5846
    For example, if 65 homes in a particular market area were sold for between $175,000 and $200,000 in the last 12 months and there are currently only 14 listings for sale, this would imply that there is an undersupply of homes in the market because there is only a 2½-month supply left at the current rate of sale.
2. Public Records: County recorder offices, assessor's offices, and other government agencies maintain records of property ownership, sales transactions, and property characteristics. Some assessor’s offices publish deeds with sale prices, some only make physical data accessible, and others publish very little data for appraisers to use.
3. Commercial Data Providers: Companies like CoStar, Real Capital Analytics, and RCA Analytics provide detailed information on commercial properties, sales transactions, and market trends.
4. Appraisal Institute: This professional organization offers various data products and resources for appraisers.
5. Real Estate Transaction Standard (RETS): The Real Estate Transaction Standard (RETS) is making it easier for data to be entered in national property databases. Under the RETS, brokers can enter listing data once and deliver it to multiple databases. The RETS also eliminates the need for duplicating data and the extra time and expense associated with converting data into multiple formats.
6. Published News: Local newspapers and business trade publications can be useful sources of real estate data.

2.3 Data Verification

It is crucial to verify the accuracy and reliability of data obtained from any source. Verification methods include:

*   Confirming sales data with buyers, sellers, or real estate agents. If you put data on the page, it has to be absolutely correct, and any error is a big problem. For a residential appraisal, this type of appraiser would use only three comparable sales but would call the brokers on all three sales to confirm the property condition, terms, and other relevant data.
*   Inspecting properties to verify physical characteristics and condition.
*   Reviewing public records to confirm ownership and sales information.
*   Cross-referencing data from multiple sources to identify inconsistencies.

3. Analyzing Market Data

Once data has been collected and verified, it must be analyzed to identify market trends and support value conclusions. Analytical techniques include:

3.1 Statistical Analysis

Statistical methods can be used to quantify market trends and relationships. Common statistical measures include:

*   Mean: The average value of a dataset.
*   Median: The middle value in a sorted dataset.
*   Standard Deviation: A measure of the dispersion of data around the mean.
*   Regression Analysis: A statistical technique used to model the relationship between a dependent variable (e.g., property value) and one or more independent variables (e.g., size, location).

Equation 3.1: Multiple Linear Regression
Y = β0 + β1X1 + β2X2 + … + βnXn + ε

Where:
Y = Dependent variable (e.g., property value)
X1, X2, …, Xn = Independent variables (e.g., size, location)
β0, β1, β2, …, βn = Regression coefficients
ε = Error term

Practical Application:
Regression analysis can be used to estimate the impact of property size, location, and other characteristics on property value.

3.2 Supply and Demand Analysis

Analyzing the balance between supply and demand is crucial for understanding market dynamics. Key indicators include:

*   Vacancy Rates: The percentage of unoccupied units in a market.
*   Absorption Rates: The rate at which new units are being absorbed into the market.
*   Construction Starts: The number of new construction projects being initiated. The rate of construction starts changes with demand, but the response time can be very slow. Overbuilding or underbuilding will result in the short run.

Equation 3.2: Absorption Rate
Absorption Rate = (Number of Units Absorbed) / (Total Number of Units Available)

Practical Application:
A high vacancy rate and low absorption rate indicate a weak market with excess supply.

3.3 Trend Analysis

Trend analysis involves examining historical data to identify patterns and predict future trends. Techniques include:

*   Time Series Analysis: A statistical method used to analyze data collected over time.
*   Moving Averages: A technique used to smooth out fluctuations in data and identify underlying trends.

Practical Application:
Analyzing historical sales prices in a neighborhood to identify a long-term appreciation trend.

4. Common Pitfalls in Market Analysis

Appraisers must be aware of common pitfalls that can lead to inaccurate❓ market analysis. These include:

*   Confirmation Bias: Seeking out data that confirms pre-existing beliefs and ignoring contradictory information. Appraisers often assume that a market is moving in one direction or another and then find out that the statistics do not confirm the conclusion.
*   Overreliance on Limited Data: Drawing conclusions based on insufficient data.
*   Using Unreliable Data: Using data from questionable sources without verification.
*   Failing to Account for External Factors: Ignoring economic, demographic, governmental, or social factors that can impact the market.
*   Not accounting for the time-frame and how old information can be useless or harmful.

5. Competitive Supply Inventory

Various associations and organizations should be able to provide the number of competing commercial and industrial properties.

6. Subject Property’s Current List Price

USPAP requires all appraisers to indicate the current list price of the subject property if it is currently offered for sale.

7. Listing & Offerings

Listings are of properties that are currently on the market but do not have an accepted offer yet. In the case of a comparable sale, the price is the amount the buyer was willing to pay and the seller was willing to accept. In the case of a listing, the list price is only the price the seller is willing to accept. This data can only indicate what a property will not sell for.
Conclusion

A thorough understanding of market trends and the ability to collect and analyze relevant data are essential for producing credible and defensible real estate appraisals. By carefully considering economic, demographic, governmental, and social factors, and by utilizing sound analytical techniques, appraisers can develop well-supported value opinions that meet the requirements of USPAP and the expectations of clients.