Hot Pockets. Yep, I’m about to use them to explain the housing market. That either makes me deeply creative or really immature. I’ll let you decide. On a serious note though, let’s talk about this analogy and consider the importance of giving value adjustments to comps during an increasing market. As always, I’d love to hear your take in the comments below.
Hot Pockets analogy: The real estate market is like a Hot Pocket taken out of the microwave a tad too early. Some portions are blazing hot while others are only warm or frozen. Like a Hot Pocket, we can say the real estate market is “hot” overall, but it’s definitely not the same temperature in every neighborhood or price range.
Thoughts on making adjustments in an increasing market:
- Changing Market: If the market has changed since the most recent sales got into contract, a value adjustment may be needed. In other words, if the market is now higher or lower than the sales, we can account for that in an appraisal (or listing) by making an up or down value adjustment to the comps. Of course there needs to be support for making such an adjustment. We can’t just say, “There’s no inventory, so value must be higher”. We need to rather find support in the market (see #2 and #3).
- Pendings vs. Sales: There are many signs of an increasing market, but one of the best things to do is compare competitive pendings and sales. Are pendings getting into contract at higher levels? The other day I appraised something where pendings were about 3-4% higher than similar sales from December, so I ended up giving a 3-4% upward adjustment to a couple of sales I used from November and December. I didn’t have many recent sales to work with unfortunately, but comparing a few older sales with a few current pendings helped me see the current market. Remember, the entire county might show certain trends, but we have to look in each neighborhood to find neighborhood trends (which could be different).
- Contract Date: When making adjustments we need to look at when the comps got into contract. One comp may have a contract date four months old, while another is from 40 days ago. The change in the market could easily be different for each comp, which means it’s okay to give big adjustments to some comps and smaller ones to others (or no adjustment).
- The Real Price: In an increasing market it’s very helpful for appraisers (and agents) to know the exact price of pending “comps” where possible. After all, we might see something listed as “pending” in MLS, but the real contract price could be higher or lower. On one hand appraisers might give less weight to pendings because we don’t know the precise dollar amount in many cases, though when agents divulge the exact contract price and terms, it can help appraisers give even stronger weight to pendings in the neighborhood.
- Imperfect Data: It would be nice if all neighborhood data was perfectly aligned, but sometimes it’s conflicting, which means we have to use good judgement. Does that one high sale or pending really reflect the market or not? Is it reasonable? Do those two lower pendings mean the market is starting to soften? Did the hefty credit to the buyer in that one comp inflate the sales price? At the end of the day we have to spend time weighing both sales and listings to see the market, which means sometimes we end up throwing out certain sales because they’re outliers more than anything.
I hope that was helpful.
Questions: When was the last time you ate a Hot Pocket? Anything else you’d add to this post? I’d love to hear your take
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Always something creative Sac Ryan. Thanks for the laugh. So is quantitative easing the susceptor (yes, that’s really what it is called, look it up :-),) on the Hot Pocket? You should have ended this post with the video, Snoop Dogg, “Pocket Like It’s Hot”.
Nice word Gary. I had to Google it. 🙂 I never knew about that Snoop Dogg song. Hilarious. I do know about Jim Gaffigan though. If you haven’t seen this, it’s pretty funny.
https://youtu.be/wmHSe_S04CU
Good stuff, Ryan. You certainly have the creative juices. ! You are spot on regarding some areas being blazing hot while others are frozen. 🙂
O.k. I’m hungry now. Better grab a snack before my inspection.
Thanks Wendell. So true about the market. i would add not every property type is experiencing the same trends either. We might say the single family detached market is “hot” in an area, but that doesn’t mean vacant land, condos, multi-units, etc…. are experiencing the same trend.
Go get that snack. 🙂
Creative post, Ryan!
The way I reconcile the “hot and cold” differential is by doing both a laser-focused, tight, map radius search, and a larger sample, more general search based on just the numbers.
Having both of these numbers helps to identify what is likely realistic.
Thanks Nathan. I love the way you continued the analogy here. 🙂 I like how you look at the immediate market and the wider market. I think there is tremendous value there. At least that’s what I think you’re saying.
Great explanation and analogy. I enjoyed sharing it. Thank you. 🙂
Thanks so much Kaye. 🙂
I agree with the Hot Pockets view. Just a quick peek at the monthly stats published in the Bee shows that, at least by zip codes, the market is varying at different rates. It should be kept in mind that those percentage figures are crude and would need much refinement before one could rely on them, but they do illustrate your point.
One thing I take issue with is your methodology for making the time adjustment. Basically, you said you take the subject’s contract price and compare it to sales of comparables in the past in order to arrive at a time adjustment. In the old days we called this approach “self adjusting comps”. In my opinion it is a dangerous practice unless you proceed with caution. Just because a sale price is higher than those of comparable sales in the past, it does not automatically imply that the higher price is justified. It could be just an oddball high sale, never to be repeated again.
Before proceeding with your approach, you need to consider other indicators of the market. You also need to consider the buyer’s motive(s) for the subject’s purchase. The latter may or may not be available. The selling broker may give you a story, but do you want to rely on that, possibly sugar coated, version? Hearing from a buyer that the house was selected because of the “wonderful” color schemes or some other such drivel, may cause you to consider if the contract price is indeed reflective of an increasing market, right?
Let’s review the market indicators. The 1004 MC makes a somewhat fitful attempt to force some appraisers to look at the indicators. Market exposure time, days on market, median price trends over the past 12 months, and number of competitive listings all tell a story. If they support a tight market, with limited inventory, then the self adjustment you proposed works. If they are flat or downtrending, then, in my opinion, the self adjustment leads to a bad/erroneous adjustment.
Russ
Thanks Russ. I appreciate your take and thoughts on the matter. I always welcome constructive criticism too, and I’m grateful for the conversation. You said, “just because a sale[s] price is higher than those of comparable sales in the past, it does not automatically imply that the higher price is justified”. I agree. The market is not made by one sale and one pending too, and we must really see that. We need to consider how the market as a whole is moving, and we need to definitely consider the story behind all sales and pendings too, which is why in part I mentioned the “real price” above. As my last point indicates, we need to use good judgement by not just seeing a price. What is behind the price? What is behind one higher pending or two lower pendings? I also linked to an article to consider some of the signs of an increasing market. Like any blog post, it needs to be short enough to read but long enough to carry substance. I agree we must look deeper into the market and consider things like days on market, seasonal trends, the sales to list price ratio, etc…. It’s never just about sales vs. pendings, though it is a very critical piece of the pie as long as the data is there. Again, we need more than just one example to see the market, which is why I talked about multiple pendings vs. multiple sales above. I did not mention the graphs I made though because seeing the market visually can be a profound way to see the direction of value – especially in the midst of very limited data.
The 1004MC is an attempt, but I find it to be misleading at times. Depending on what has sold and the time of year, it may indicate a totally opposite trend. It’s really not very useful in the midst of low inventory too. This is why I give it no real weight whenever I do a report for a lender. It’s interesting to look at, but I don’t think it carries much weight.
The big issue is last year the median price, average sales price, and avg price per sq ft all increased by a good 7-8%, yet many appraisal reports said values were “stable” the entire time. So while this conversation is important, there is clearly a breakdown in methodology and recognizing what the market is doing (and then adjusting for that if relevant). Or the median price in Sacramento County has increased by 90% since January 2012, yet the market is always “stable” in appraisal reports. Hmm….
For any onlookers, here is the article regarding signs of an increasing market (or a “hot” market at the least): https://sacramentoappraisalblog.com/2016/04/12/no-mans-land-the-aggressive-real-estate-market/
Such a well written article using the hot pocket as an analogy! You’re a gifted writer Ryan since you can use simple examples to explain a more difficult topic. The point that I feel is most important in a hot market is the ability to get contract information on pending sales since they are the best indicator of value. If this is not possible then we sometimes have to apply market derived sale price to list price ratio to listing prices, which is not always accurate. I know some agents say they are not able to disclose this information but others do disclose it. They should know that the appraisers ability to get this information can mean the difference between a home appraising or not. Keep up the good work Ryan.
Tom, I really appreciate the kind words. Truly. You hit the nail on the head with knowing the contract information on pending sales. Very well stated.
Great analogy Ryan! Thanks for the info.
Thanks so much DeeDee. 🙂