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One of the most controversial topics among appraisers and loan officers these days is whether or not a property is located in a “declining market”. The question that is often not answered is what determines a declining market.

Is it the Case Schiller Index? Is it the number of foreclosure properties in the neighborhood? Is it the MRIS zip code statistical summary of average sale price or median sale price changes over the past year? Is it the newspaper reports that say “county officials” (unnamed) report that property values are down 3%, 7% or 12% and that is why they must raise the tax rate? Is it the big Lenders who issue notices that certain markets are now considered “soft” so loans must be depreciated by 5%? Or is it some secret formula appraisers use to come up with these widely varying conclusions?

There are a variety of opinions and, to be sure, it is not a simple explanation. I have this conversation about once a week with loan officers and underwriters who are trying to make a loan to serve their client and meet all the myriad of requirements that lenders have for borrowers today.

Here are a few thoughts that might help us understand the issue.

• Location is everything. A subdivision may have declining values but another one, within the same county a few miles away, may be stable. Looking at local neighborhoods and the recent sales trends is critical in determining values. In the Washington metro region, areas closer to the city have maintained strong value. The farther away from the city, declines in values have had a greater impact.

• Statistics are important. When I look at an area I review the recent sales and re-sales to see what kind of changes occur (+ & -). I use the MRIS statistical summaries for zip codes to look at trends and volume. I also look at current listings and DOM (days on market) to see what houses sell and what houses sit on the market for months. Price is usually a big factor. Using the technology available today is important in gathering the data needed for determining market value.

• Market factors are intertwined. When new home builders want to move inventory they can cut prices, sometimes by $100,000. The re-sale market seller does not have that same perspective on selling their house. And yet, the competition from new homes and their lowered prices has the same effect on the re-sale market forcing those prices down as well. When borrowers default on their home loans and banks end up with the property, the perspective on value is different for the bank then a homeowner wanting to re-finance their house. The bank does not want to own houses, they want to own the loan. Banks are not very good at marketing real estate so prices fluctuate around decisions involving risk and exposure for the bank. All these factors can make estimating value a challenge. When lending is tight people can afford less house. This also drives values down. All these market factors are swirling around and can be quite confusing to the casual observer.

That is just a brief summary of some very complicated issues. You probably have your own perspective and insights as well. I would love to hear them!

These are interesting times in the housing industry with pressures coming from every side. Maintaining our integrity and professional standards as we make fair and objective assessments for our clients is what McGraw Appraisals strives for every day. Thanks for taking the time to read My Blog!

Jim