What makes real estate values move? I often ask this question when speaking at real estate functions, and it’s interesting to hear the responses. I usually start by showing a photo of Luke Skywalker with the caption, “Luke, use The Force to make value move.” Then I ask, “Is that sort of like what appraisers do? Can they make a market move depending on how they appraise properties?” We all know changes with interest rates, housing inventory, the economy, or cash investors can definitely influence property values. That’s obvious. Yet when asking the question, “Do appraisers make values go up or down?”, there is often a bit of hesitation. What do you think? How would you answer this question if a client asked you?
Do appraisers make the market move or not? There are so many “forces” that impact real estate values. In fact, if you’ve been around this blog long enough, you’ve heard my schtick about how real estate is like a multi-layered cake since there are many “layers” in a market that impact or create value. Check out the cake below to get more fully what I mean (this is an updated image). Yet it’s still easy to think appraisers are the ones making a market move since they are the ones appraising properties at higher levels. Unless there is fraud going on though, the higher appraisals are really a result of the layers of the market having changed. It’s not appraisers pushing the market up, but rather the market moving and appraisers simply interpreting that change. Think about 2012 when the market hit bottom and values began to increase quite rapidly – especially in early 2013. If anything, during this most recent boom, appraisers were accused of appraising properties too low rather than inflating values.
An Example of 1% interest rates: Imagine if interest rates hit 1% tomorrow. What would that do to home prices? First off, the market would be instantly flooded with buyers because of how much more affordable it just became to borrow money. This would create intense competition resulting in a dramatic lowering of inventory, which would inevitably increase prices because of the scarcity of property. In the midst of shifting “layers” of real estate, appraisers would rightly be appraising properties at higher levels since the market is now hands-down willing to pay those prices. But appraisers didn’t actually move values higher, did they? They simply interpreted the market that changed.
Key Takeaways:
- There are many forces that impact value in a real estate market.
- Memorize the cake analogy so you can use it with your clients and speak definitively about what is making value move in your market.
- Appraisers interpret the market rather than move it. Appraisers are more like a measuring tape than a gas or brake pedal.
- A market does not need appraisal fraud to see values increase. This idea tends to float around the real estate community, but it’s a misunderstanding of what really drives real estate.
By the way, I’ll post more specifically on Sacramento market trends next week. Be on the lookout for some stellar graphs to use for your newsletters and emails to clients.
NOTE: Appraisal fraud and low appraisals could certainly be a layer in the cake above, but fundamentally appraisers are not drivers, but interpreters. That’s my main point. We could easily talk about fraud or even whether appraisers are doing a good job interpreting the market or not, but that’s another post.
Questions: What else makes real estate values move? Any appraisal stories or insight to share?
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Good blog! Of course we are all waiting to see how long the Fed is going to keep floating low interest rates and how long the Chinese and other bond buyers are going to put up with this. It all seems precarious to me.
P.S.
I would appreciate if real estate agents stop referring to the American Dream as home ownership. Mainly I think the dream is about the opportunity for us to better ourselves (spiritually and materially) and for our children to do better than us. According to most economists I have read, that dream is under threat if not clearly unlikely for most. I think we all pray that will change. But saying home ownership is the American Dream is fatuous at best.
Thanks Ricardo. It will be interesting to see what they do. The Fed said they would raise rates once national unemployment hit 6.5%, but after hitting 6.3% in May, they backed off that previous plan. I think they know the economy is still very fragile. I heard news recently that Europe may entertain some of the same methodology of The Fed in buying bonds as a way to stimulate the economy.
Home ownership is not an easy dream to attain in many places of the country where prices are so high. The only way for some people to afford is when a market utterly crashes. With interest rates so low this decade, it has certainly helped home ownership too.
Hi Ryan:
Guess what I meant is that our kids should be our priority — that’s the American Dream to me. Nothing wrong with owning a home, but it’s way down the list. And by ‘our kids’, I mean all of them; we don’t even have any of our own .One trillion in student loans is not part of a good economy, I think.
I thought the US Fed was selling bonds to finance the overnight rate on loans they make to our banks, which I believe are still not seperated into commercial and investment banks. Europe is confusing — good info is hard to get. From talking to folks, I gather Britain is in a housing bubble. Spain, Italy, and of course Greece, are in bad shape. Germany and the Scandia countries seems to be doing well. France? Don’t know. In general I hear the financial heavyweights will be in Asia. The problem in generalizing about countries is that banks are so interconnected, it’s impossible to gauge the impact of one country or another.
all the best,
ricardo
Ricardo, I completely agree. If at the end of life all we have is stuff, we have failed. I am only a causal basketball fan, but this conversation reminds me of the Twitter profile of one of the Kings’ players, Isaiah Thomas. His profile reads in part: “If all I’m remembered for is being a good basketball player, then I’ve done a bad job with the rest of my life.” There is much more to life than what we do from 9-5pm and what we own too.
I continually hear news of problems in Europe and even China (though some say China is doing really well). The news piece I heard yesterday on NPR I believe was about potential quantitative easing in Europe as has been done here (http://bonds.about.com/od/advancedbonds/a/What-Is-Quantitative-Easing.htm).
On a different note, it’s been interesting to watch overseas buyers make an impact in the Southern California market. In some senses it seems these Chinese buyers are to SoCal what Blackstone was to us in Sacramento (in terms of helping to boost values and create competition). I would have to see stats to know if this is a perfect correlation, but they are certainly a “layer of the cake” in terms of helping to shape values.