Market Influences and Data Collection for Appraisal

Chapter Title: Market Influences and Data Collection for Appraisal

Introduction

Real estate appraisal is fundamentally an exercise in understanding and interpreting market behavior. The value of a property is not inherent; it’s a reflection of the interactions between supply and demand within a specific market context. This chapter delves into the various market influences that shape real estate values and explores the crucial processes of data collection necessary for accurate and reliable appraisals. It explains relevant scientific theories and principles, and includes examples of practical applications and related experiments, using mathematical formulas and equations where appropriate.

1. Understanding Market Influences

Real estate markets are complex adaptive systems influenced by a multitude of factors that can be broadly categorized as:

1. Economic Influences: These are the primary drivers of real estate demand and supply.

   • Employment: Job growth in a region leads to increased demand for housing (residential, commercial, and industrial). Conversely, job losses decrease demand. The employment rate (E) is a key indicator, often measured as the percentage of the labor force employed.
     Practical Application: Track employment statistics from the Bureau of Labor Statistics (BLS) or local economic development agencies. Correlate employment growth with changes in housing prices or commercial vacancy rates.
   • Income Levels: Higher disposable income allows individuals and businesses to afford more expensive properties. The median household income (I) is a commonly used metric.
     Practical Application: Analyze income distribution within a market area. Determine the affordability of different property types based on prevailing income levels. Relate income trends to the types of property being built.
   • Interest Rates: Interest rates directly impact the cost of financing real estate purchases. Lower interest rates generally stimulate demand.
     Formula: Monthly Mortgage Payment (M) can be calculated using the formula: M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1] where P is the principal loan amount, i is the monthly interest rate (annual rate / 12), and n is the number of months of the loan. A small change in ‘i’ can have a large effect on ‘M’.
     Practical Application: Analyze the relationship between interest rate fluctuations and housing sales volume. Track changes in mortgage rates and their impact on housing affordability indices.
   • Inflation: High inflation can erode purchasing power and make real estate investments more attractive as a hedge against inflation.
     Formula: Real Interest Rate = Nominal Interest Rate - Inflation Rate.
   • Economic Cycles: Real estate markets are cyclical, experiencing periods of expansion, peak, contraction, and trough.
     Practical Application: Analyze historical data to identify the current stage of the real estate cycle. Use leading economic indicators to forecast future market trends.

2. Demographic Influences: Changes in population size, age structure, household composition, and migration patterns impact real estate demand.

   • Population Growth: An increasing population creates greater demand for housing and commercial space. Population density (PD), measured as population per square mile, can indicate the intensity of demand.
   • Household Formation: The rate at which new households are formed influences the demand for housing.
     Practical Application: Analyze demographic data❓ from the Census Bureau to identify population trends. Correlate population growth with new housing construction.
   • Age Structure: The age distribution of the population affects the types of housing and services demanded. An aging population may require more senior housing and healthcare facilities.
   • Migration Patterns: In-migration to a region increases demand for housing, while out-migration decreases demand.

3. Governmental and Legal Influences: Zoning regulations, building codes, property taxes, and government subsidies can significantly influence real estate values.

   • Zoning Regulations: Zoning laws dictate the types of land uses permitted in specific areas. Strict zoning can limit supply and increase property values.
   • Building Codes: Building codes specify minimum standards for construction and safety, influencing the cost and quality of buildings.
   • Property Taxes: High property taxes can deter investment in real estate.
     Formula: Effective Tax Rate = (Annual Property Taxes / Market Value) * 100
     Practical Application: Compare property tax rates across different jurisdictions. Analyze the impact of property tax changes on real estate values.
   • Government Subsidies: Government programs that subsidize housing or development can stimulate demand and increase property values.

4. Social Influences: Changing social attitudes, lifestyles, and preferences can affect the demand for certain types of real estate.

   • Lifestyle Preferences: Trends towards urban living, sustainable development, or specific architectural styles can influence property values.
   • Social Trends: Social attitudes towards renting versus owning, commuting distances, and community amenities can affect housing choices.

5. Environmental Influences: Environmental factors such as climate, natural resources, and environmental regulations can affect real estate values.

   • Environmental Regulations: Restrictions on development in environmentally sensitive areas can limit supply and increase property values.
   • Climate Change: Rising sea levels, increased frequency of extreme weather events, and changes in temperature patterns can affect property values in vulnerable areas.

2. Data Collection for Appraisal

Effective data collection is paramount to developing credible and supportable appraisal opinions. Data can be broadly classified into two categories:

1. Macro-Level Data (General Market Data): This includes information about the overall economy, demographic trends, and government regulations that affect real estate markets. Macro-level data helps appraisers understand the broader context in which a property is valued. Sources include:

   • Government Agencies: US Census Bureau, Bureau of Labor Statistics (BLS), National Association of REALTORS®.
   • Economic Research Firms: These firms provide forecasts and analyses of economic and real estate trends.
   • Industry Associations: These associations collect and disseminate data on specific sectors of the real estate market.

2. Micro-Level Data (Specific Market Data): This includes information about the subject property, comparable sales, leases, and other market phenomena relevant to the specific appraisal assignment. Micro-level data is used to directly estimate the value of the subject property. Types of Micro-level data include:

   • Subject Property Data:
     • Physical characteristics (size, age, condition, amenities)
     • Legal characteristics (zoning, easements, restrictions)
     • Location characteristics (neighborhood, access, proximity to amenities)
   • Comparable Sales Data:
     • Sale price
     • Date of sale
     • Property characteristics (similar to the subject property)
     • Conditions of sale (financing, motivations of buyer and seller)
   • Rental Data:
     • Rental rates
     • Occupancy rates
     • Lease terms
   • Cost Data:
     • Construction costs
     • Land values
   • Listing Data:
     • Current prices of similar properties on the market

3. Data Sources and Verification

Appraisers must use reliable data sources and verify the accuracy of the information collected.

1. Multiple Listing Services (MLS): The MLS is a common source of data on residential properties, but data quality can vary.
2. Public Records: County recorder’s offices, assessor’s offices, and zoning departments are valuable sources of information on property ownership, taxes, and zoning regulations.
3. Commercial Data Providers: Companies like CoStar and Real Capital Analytics provide data on commercial real estate markets.
4. Direct Observation: Appraisers should physically inspect the subject property and comparable properties to verify the accuracy of data obtained from other sources.
5. Interviews: Appraisers may interview brokers, buyers, sellers, and other market participants to gather information about market conditions❓ and specific transactions.

4. Competitive Supply Inventory and Demand Studies
A. Competitive Supply Inventory: Appraisers assess the current supply of properties that compete with the subject property. This involves:
* Identifying all similar properties in the market area.
* Determining the number of vacant or available properties.
* Analyzing the absorption rate (the rate at which properties are being sold or leased).
B. Demand Studies: Appraisers analyze the factors that drive demand for real estate in the market area. This involves:
* Analyzing demographic trends.
* Tracking employment growth.
* Monitoring interest rates.
* Assessing consumer confidence.

5. Statistical Analysis of Market Data

Appraisers can use statistical techniques to analyze market data and identify trends. Common statistical methods include:

1. Regression Analysis: Regression analysis can be used to identify the relationship between property characteristics and sale prices.
   Formula: A simple linear regression model can be expressed as: Y = a + bX + e, where Y is the dependent variable (e.g., sale price), X is the independent variable (e.g., property size), a is the intercept, b is the slope, and e is the error term.
2. Time Series Analysis: Time series analysis can be used to track changes in property values over time.
3. Descriptive Statistics: Descriptive statistics such as mean, median, and standard deviation can be used to summarize market data.

6. Experiment: Impact of Economic News on Property Values
Objective: To investigate how the release of economic news affects property values.
Method:
1. Select a set of properties in a well-defined market.
2. Track the values of these properties over time.
3. Monitor the release of key economic indicators (e.g., employment reports, interest rate announcements).
4. Analyze whether there is a correlation between the release of economic news and changes in property values.

7. Experiment: Impact of Zoning Changes on Property Values
Objective: To investigate how zoning changes affect property values.
Method:
1. Identify an area where a zoning change has occurred (e.g., rezoning from residential to commercial).
2. Compare property values in the area before and after the zoning change.
3. Control for other factors that may have affected property values (e.g., economic growth, demographic changes).

8. Fair Housing and Data Collection

It is crucial to adhere to fair housing laws❓❓ when collecting and analyzing data. Appraisers must avoid using demographic data in a way that could discriminate against protected classes.
Helpful Hint: More discussion about fair housing regulations can be found in the Conduct section of the Ethics Rule of the Uniform Standards of Professional Appraisal Practice (USPAP) and USPAP’s Advisory Opinion 16 (AO-16).

9. Conclusion

Understanding market influences and collecting reliable data are essential for accurate real estate appraisal. By using sound scientific principles and statistical methods, appraisers can develop credible and supportable opinions of value.