Making the Call: Declining or Stable Market?

Editor’s note: Determining what is or is not a “stable” market in these turbulent times is confusing for some. Appraisers report having appraisals rejected because the “Declining Market” box is checked on the Fannie Form. Others say they would be admonished for not indicating a declining condition. As always, the best advice is to be accurate. Unfortunately, there is no hard and fast method for making the call. Here are a few suggestions on how to determine what kind of market you’re in.

Making the Call: Declining or Stable Market?

Frederick R. Ruffell, IFA  an appraiser in San Diego, Calif. says, “Define your neighborhood and market (there are sub markets within some neighborhoods, i.e. Condos vs. Single Family Residences, etc.) then pull your sales stats year to date (YTD) for the year, then pull your sales stats YTD for the same period last year. My personal magic number is three percent. That is to say that if there is a three percent or greater change in the median AND mean sales prices, then I deem the market ‘trend’ to be something other than ‘stable.’ If there is a positive change then I deem the ‘property values’ trend to be ‘increasing.’ If there is a negative change then I deem the ‘property values’ trend to be ‘declining.’”

Ruffell continues, “I then take the percent change and divide by the number of months used for the YTD and multiply the comps sales prices by that figure by their age (in months back to the contract date, not close of escrow) and round that figure in the grid. I then scan those sales stats into the report and scan the latest local news article into the report as well. The Fannie Mae National Property Disposition Center has complemented me for using this approach and documentation.”

“Earlier in the year I will use something other than YTD; maybe go back six months from the effective date and then use a similar period a year prior. It just depends on the statistical capabilities of the MLS or public records provider that I am using. I cover an area that uses three different MLS boards and I have two public record sources,” Ruffell said.

Doug Smith, IFAS has a different take, “Yes, use local MLS data in the same way peers in your market use the data but on this particular issue, Fannie Mae is telling appraisers the decision reverts to a Scope of Work issue and both the appraiser and the lender have a shared responsibility. They also support using third party sources.”

Smith continues, “The big problem with MLS data is one word: Concessions. A declining market does not turn off and on like a switch. First, there are concessions, then lengthening of days of the market, then some foreclosures start to slip into the market, then builders add incentives and free add ons, then finally properties start renting. Finally, prices start to erode and auctions spring up. When an appraiser is on that flattening curve, local data is hard to interpret. For now, do the best you can with ordinary data everyone else is using but also rely on third party data that can be included in the work file.”

Smith continues, “According to the Fannie Mae FAQs both lenders and appraisers are responsible for determining whether a property is located within a declining market. Lenders are directed to use third party sources and appraisers should too.”

Stable vs. Declining
Mike Boyd, appraising in Santa Rosa, Calif. says that unless there is an outside, long-range influence affecting values, such as a major industry/employer leaving, he does not consider it a declining market despite lower values. He says that sales prices are only part of the picture. “The ‘market’ is comprised of all aspects of the local economy including job growth, infrastructure, schools, and so forth. Sales prices of homes are just that- the sales prices of homes. There can be many reasons why sales prices rise and fall. One of those reasons are the dynamics of the local economy. I maintain that if the local economy is healthy, the infrastructure strong, schools are adequate and job growth projections are good, then fluctuations in housing prices are temporary,” he said.

Boyd continues, “As is the case now in my market area (Sonoma County), these factors look at least stable. Our general economy is healthy. Values have diminished but I believe the loses can be attributed to the unprecedented low interest rates we saw coupled with absurd loan programs that required no investment, no verification of income and marginal credit. And, once prices reach a sustainable level, you will begin to see an increase in sales activity with values increasing at three-six percent per year.”

Tricky Business
Timothy Evans, a Certified General in Iowa and Michigan, explains why it can be difficult. “Appraisal is an art based on facts and those facts have to be substantiated,” Evans said. “I have been studying the Monroe County (Michigan) home prices for a year now because of my imminent move to the area. I was sure, downright positive, that home prices were absolutely in the toilet. I was downright wrong! I thought I knew what I was talking about. I went to the assessor to interview him about a commercial report I am doing in the area. He said that prices were dropping slightly but in the price range I was looking at, they were taking a big hit. I would hate to have to defend putting a stable market in a report without facts before my State Board. ‘Well sir, I thought they were stable.’ My mistake was only learning about a certain sector of the local market, not the whole market.”

More Guidance
1. You can find more in Fannie Mae’s 07/11/07 Announcement on Declining Markets.
2. PMI Mortgage Insurance Co. has released its U.S. Market Risk Index, which ranks the 50 largest metropolitan statistical areas, according to the likelihood that home prices will be lower in two years. Read the report now:  For more about the report from The PMI Group, visit:
3. For more see this story: Appraising in a Deteriorating Market

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