If values are not declining, why are values continually declining?
The Professional Appraisal Associates (PAA) office performs numerous reviews every year, and has noted a trend amongst local appraisers marking appraisal reports with the "Stable" neighborhood housing trends check box, as opposed to the controversial "Declining" property value market conditions. This method helps further promote the appraiser’s reputation and image with brokers to encourage future work volume.
This begs a very simple question, if values are not declining, why are values continually declining?
There is still a continual downward trend, evidenced by repeated price reductions being noted on Active/Pending listings in the area. Our Active/Pending listing database must now be frequently checked due the significant price reductions being made each month. This continual depreciation is also reflected in wide area MLS statistical data, nationwide price surveys, and the appraiser's overall experience in the area. Declining property values have been consistently reported in Santa Barbara County by virtually all the major private and government nationwide price surveys including; Standard & Poor's (S&P)/Case-Shiller, Office of Federal Housing Finance Agency (FHFA), and the National Association of Realtors (NAR) housing market indexes.
Unfortunately, there is no evidence of any sustained price recovery occurring at this time, as much as we wish the contrary. Although a brief stabilization and slight increasing trend began to manifest within the last several months, this trend never really gained traction and was not sustained through back to back quarters and price reporting periods. It now appears that property values have once again began the trend downward here in Santa Barbara County.
Most Appraisal Reports today include the newly adopted 1004MC Addendum, which is a form of Market Conditions Summary. The primary intent of the required 1004MC Form/Addendum as described by the Fannie Mae Selling Guide introduction is for the appraiser to report on the primary indicators of market condition for properties in the subject neighborhood by noting the trend of property values (increasing, stable, or declining), the supply of properties in the subject neighborhood (shortage, in-balance, or over-supply), and the marketing time for properties (under three months, three to six months, or over six months) as of the effective date of the appraisal. Fannie Mae also expects the appraiser to provide their conclusions for the reasons a market is experiencing declining market values, an over-supply of properties, or marketing times over six months. To further enhance the transparency of the conclusions made by the appraiser related to these market trends and conditions, the Form 1004MC is now required for all mortgage loans delivered to Fannie Mae and is intended to support/justify the indicators of market conditions contained in the main appraisal report.
The 1004MC Form Market Conditions Addendum is a statistical data trend tool that relies on proper input data to yield reliable results with a high confidence level.
PAA routinely performs numerous reviews each year, and has noted that local area appraisers either inadvertently or deliberately manipulate the 1004MC input data collection process through control of the statistical sampling size and selected sample data points. By significantly reducing the statistical sample size and price range, you can quickly achieve the desired output results and create false trend indications. This can easily be achieved by specifically reducing and handpicking the sample population to a very minimal number to obtain a desired output/result. The 1004MC form is a statistical tool, and correct statistical data collection and input data is essential for accurate and meaningful results.
As opposed to using relevant and proper large data population sampling through the use of numerous comparable sales/data points and a larger statistical population, if you reduce the sampling size to very few sales/data points (Undercoverage), and then manipulate the observation sample to include only specially selected properties (Selection bias), a positive trend indication can easily be derived. This method also significantly distorts the months of housing supply and absorption rates as well.
Population size (sampling size), and an unbiased or random subset of individual observations is critical to accurate statistical analysis. The larger the sample size, the more accurate and higher confidence level that the results truly reflect the actual population. By using 1 and 2 specially selected sales/data points in the 1004MC for each given time period, the appraiser’s are able to project a stable or positive trend, even though we continue to face repeated sales price reductions and a continuing depreciation trend across markets when looking at the broader and most recent closed sale results. Appraiser’s also save the time and effort of performing broader area MLS data collection by simply manually entering only a few hand selected comparable sales in the form.
Per the Fannie Mae 1004MC guidelines, the appraiser is supposed to include the comparable data that reflects the total pool of comparable properties from which a buyer may select a property in order to analyze the sales activity and the local housing supply. There are typically many more than 1-3 total sales in a neighborhood for each given time period, but these numerous additional sales are simply excluded from the observation/sample to help bias the ultimate results. 1-3 data points are simply not a statistically relevant sample size to derive credible results with any degree of confidence.
This reduced 1004MC sampling technique helps further promote the appraiser's reputation in not checking the controversial and stigmatized “Declining” Property Value box, in an effort to gain increased volume of future perspective appraisal work from lenders/brokers or save data collection time.
We are your Santa Barbara County specialists for accurate market value analysis. For more information about Professional Appraisal Associates, visit us at our Website at: ProfessionalAppraisalAssociates.com or feel free to call us at (805) 688-5033.