Rapid price growth. That’s what we’ve been seeing lately in many markets across the country. I’d like to share some stats below for my local market and then talk about whether appraisers are keeping up or not.
RAPID PRICE GROWTH:
The orange line at the top left is the median price these past two months in the Sacramento region. The gap between 2021 and previous years is quite wide, which shows prices have gone up quickly.
SOME CHARTS INSTEAD:
If you’d rather see some numbers instead of line graphs, here’s a quick market recap. Check out that 17% price growth lately. Holy Batman!! I typically share one big market post each month with lots of visuals, but this time I’m only going to talk about prices. I’ll have much more next week and I’ll put some stuff out on Facebook, Twitter, and LinkedIn. Oh, and sometimes Instagram.
RAPID PRICE GROWTH IN NEIGHBORHOODS:
Here are a few local neighborhoods to show how much the market has turned up lately. One of the things I do as an appraiser is calculate price change by following the trendline over time and comparing it to actual sales and pendings in the neighborhood to be sure the trendline is legit. Here’s a video tutorial for how to make a scatter graph like this. See my graphs tab too for other tutorials for gettin’ visual.
Here’s an example where I appraised a unit in a small gated community with VERY few sales, so it wasn’t easy to understand what the market was doing. This is why I looked at the entire zip code in blue and gave strong weight to a couple neighborhood sales that also sold a few years ago too (I connected a line between these sales (green and orange).
ARE APPRAISERS KEEPING UP?
So the question becomes, are appraisers keeping up with the market? I’d say YES and NO. Here are a few things on my mind.
SMOKING PRICING CRACK: Some offers are disconnected from reality, so we SHOULD NOT be seeing appraisals anywhere near the contract price. We have a market where buyers are sometimes making irrational offers.
WORD ON THE STREET: I’m hearing stories of appraisals coming in at or above the contract price and ones that are lower than the contract price. It’s not all one thing, though I think the negative stories get the most attention.
THE JOB: An appraiser’s job is not to “hit the number” or make the deal work. The appraiser’s role is to reflect the market and assess risk for the lender. It’s not about whether the buyer wants the house. It’s about whether the lender should make the loan. Thus an appraisal should be a reflection of what buyers would reasonably pay as opposed to an outlier buyer willing to pay more than anyone.
BRAKES OR GAS: Appraisers are not a brake pedal or a gas pedal for the market. They are more like a mirror to reflect the market. I mention this because at times when rapid appreciation happens, it is what it is. Even if an appraiser is baffled by how much current comps and pendings are up from last year, it’s not the appraiser’s job to hit the brakes by coming in lower. There is no such thing as a market only being able to increase by 1% each month either. Look, if the market is going up quickly, the appraiser needs to adjust up and call it a day while of course supporting all adjustments and conclusions in the report. And to my colleagues, we are NOT number hitters and should NOT be letting the contract price influence us (just in case you think I’m saying that).
SALES vs PENDINGS: It’s essential for appraisers to measure the difference between sales and the current market. Sales are like historical artifacts that tell us what the market used to be like 30-90 days ago when they got into contract whereas pendings are going to be a clue into what buyers are willing to pay in the current market. How has the market changed since the price was established for the comps (more or less the contract date)? That’s exactly what appraisers need to measure and precisely why appraisers need to look at both sales and pendings / listings.
BIG ADJUSTMENTS: At times lately I’ve given some hefty market adjustments. For instance, when appraising a home in Rancho Cordova I used a really similar sale from July that sold at $365,000 and the market was willing to easily pay about $40,000 more today. That’s over 10% growth in a very short time period, but that’s what the trendline showed on my graph (see above). This rapid growth was also very clear when comparing recent sales to older sales and looking at higher pendings.
LONE RANGER PENDINGS: It’s important to not base our perception of value on one “lone ranger” pending sale. So if all the comps are at $500,000 and there is one pending at $575,000, I’m not automatically making a $75,000 adjustment up. What I want to look for is a group of pendings to tell me where the market looks to be going. Thus if I see pendings are $510,000, $512,000, $520,000, and $575,000, I can see the market is increasing and I’m going to have to figure out what my market conditions adjustment needs to be by making graphs and understanding from agents the terms of the pendings. What is the contract price? Is the seller offering any concessions back to the buyer? How many offers were there? And these days, is there an appraisal waiver or removal of the appraisal contingency? In short, there is a story to understand about each pending and sometimes the pending might reflect the market well and other times it might be something to throw out because it’s too high OR too low.
YIKES, NO ADJUSTMENTS: A friend showed me an appraisal on her house from one week ago and the appraiser correctly stated the market was increasing in value. But three out four sales did NOT have any adjustments up to account for the market increasing. I’m not saying appraisers need to always adjust every comp, but I was scratching my head wondering why an upward adjustment was not given since the market absolutely went up in value since these properties got into contract 30-60 days ago. Basically, in this case it looks like the so-called appraised value in early March was more like a reasonable value from mid-January and early February because that’s when the comps got into contract and there were no adjustments up to account for the difference. In short, when stuff like this happens, appraisers are definitively behind the market.
THOUGHTS ON COMPLAINING: On real estate forums lately I often hear agents say stuff like, “Appraisers are a joke. Show me two appraisers and I’ll show you two different values.” I get it. But let’s be real. If I asked two agents to give me a value on a house, how many different values do you think I’d get? The answer is the same. We’d see two values and sometimes the difference would be really wide. I say this respectfully and humbly because value is difficult AND there is no such thing as only one value either. There is always a reasonable range, so it makes sense to see two appraisals not come in at the same level. BUT if they’re too far apart, then clearly someone botched value…. On a side note, it’s easy to fall into the trap of speaking down to other real estate professionals, but let’s raise the bar. There is certainly a place for complaining, but don’t make it a lifestyle or shtick. This goes for the way agents talk about appraisers and the way appraisers talk about agents. Sorry for the sermon, but this is something I believe strongly. You won’t hear me disparage another group because I am a professional. I’d rather listen, educate, elevate, and of course admit when I’m wrong.
OTHER: This post is starting to be a dissertation, so I’ll stop here. What am I missing? What would you like to add? Any helpful nuggets to share?
Questions: What are you seeing happen with appraisals right now? What stands out to you most about the stats above? I’d love to hear your take.
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Ryan,
Great, timely post. I find the hardest time for me to appraise are when markets change. Catching that change is tough. Once sales have started to increase, I can figure out the appropriate time adjustment and do my job. But when it jumps or dives abruptly, tough times.
I would also add now is the time to answer the phone if an appraiser calls. Be willing to help us out with information about your pending sale (number of offers, range of prices offered, and contract price if you’re comfortable) so we can understand what’s happening today.
And if you’re that appraiser who doesn’t know how to make a time adjustment, sign up for my class next week. We’ll cover the basics.
https://www.reaa.org/reaa-school/class/leveraging-analytical-tools-assist-appraiser
Thanks Joe. Yeah, once we start getting more data from January and February the trendline becomes much more clear. That’s been my observation over the years. It takes real skill to see a market before we see a change in the stats. That’s for certain and it goes both ways with an increasing OR declining market.
I’m glad you shared the REAA link too. Joe knows his stuff everyone.
Hey, Joe, this class sounds really interesting. I see that it is on Zoom, however, I wanted to know if it would be recorded to watch at a later date since I don’t think I will be available when it is going on live.
Hey Tom. The class will be recorded and anyone who signs up for the class will get the recording. Just a heads-up.
Ryan – great observations as always. I spoke with an agent yesterday who related the following on a pending sale. “The purchase and sale agreement stated that if the appraisal did not support the agreed upon price, the buyer was willing to contribute up to an additional $70,000 in cash to make up the difference.” He didn’t mention the pending price or requested loan amount, but I think this illustrates how the market is dealing with realistic appraisals. Historically appraisals were meant to serve society with unbiased, independent and disinterested opinions of value to advise the public on matters involving property so informed decisions could be made. It would appear that prospective home buyers (i.e. Society) are going to move forward with their purchase decisions no matter what a well-supported and realistic appraisal concludes.
Thank you Jim. Excellent commentary. Appraisers serve a role, but in this wild climate lately the public has simply moved forward. Frankly lenders have too in a sense with more appraisal waivers. We are living in an interesting time. I feel for buyers out there because our market has been so lopsided lately. The good thing is we’re starting to see more listings and mortgage rates presumably ticking up may help over time also to soften some of the excessive demand.
When performing Corporate Relocation appraising, on can “plus” the bottom of the grid page under the “forecasting” line in order to move up the anticipated fair market value. (With so little inventory, supply & demand would be more of a reality than forecasting). You cannot do this on a 1004 or 1073 form. Apparently, Fannie and Freddy don’t believe in the concept of supply and demand?
Thanks Ken. I’ve never actually done relo appraisals. I’m familiar with the concept though. It’s fascinating to consider looking to the future based on current trends. I wonder how often appraisers are correct. This type of valuation takes skill to really parse trends because if you’re not in touch with the current trend, the future projection could be off also.
Ryan, you are the best. And I agree, don’t knock the hands that feed you…including other realtors, appraisers, lenders and clients. Keeping it positive brings happiness in our dealings and life!
Thank you so much Susan. It’s too easy to be negative and if that’s our paradigm we’re probably going to miss the good things unfortunately. Frankly there is so much appraisers and agents can learn from each other.
I’m reading about this in multiple markets. My question is if a house is listed at $450k but is purchased at all cash or with a large appraisal waiver for $500-600k or higher, will appraisers use or can they be requested to use by realtors that $600k sale as a comp now for future sales in the same area?
Hi Mike. That’s a great question. One sale doesn’t make or break a market. So if we see one sale at $600K and another at $350K, it doesn’t mean the market is at either extreme. This is why we don’t want to base our perception of value on one data point. Let’s look for a group. Realtors can request all they want, but I’d technically split hairs over that and rather talk about why the property was priced the way it was rather than telling or suggesting a certain “comp” be used. I’d recommend avoiding any appearance of trying to steer value.
In short, if the $600K comp closed that high for a reason beyond the market, it’s probably not really a reflection of market value. If it was an appraisal waiver, paying cash way above the appraised value, or something else, we might not want to use this one as a comp. Or if we use it, it might be best to give it far less weight because it’s an outlier more than an indicator of value. This is why appraisers need to understand the story of each comp and weigh them as reasonable or not.
Thus when I hear of a property that clearly sold too high, I’m probably going to give that one way less weight. But if there are other pendings at that level and other sales are getting close, then maybe it’s the market rather than a lone ranger. If it’s just one lonely sale though, let’s call it what it is.
For any onlookers, here is an information sheet I strongly recommend using. I love when agents in my market use this on me because they’re sharing data and essentially beating me to answering questions I tend to ask. https://sacramentoappraisalblog.com/2014/10/09/a-cheat-sheet-for-agents-of-information-to-provide-to-the-appraiser/
Awesome info as always. Thanks for all you do Ryan! I would like to highlight what you said about irrational buyers. This is so very true and because a buyer (or even a handful of buyers) are willing to pay X price for a home does not mean it will appraise at X. I can’t tell you how many times an appraisal comes in light and the agent tells me “Matt, I had 4 offers above that. How can it appraise so low.” Offers and what someone is willing to pay for a specific house won’t translate to value. (Until it translates to sold comps and pendings thus pushing up value)
Thanks Matt. It’s a crazy market out there. Sometimes buyers offer based on what they are approved to borrow too instead of what the property is worth. We have a very lopsided dynamic right now in the marketplace due to a severe housing shortage and excessive demand. It’s been tough on buyers lately to say the least, so they are offering absurdly high in many cases.
The Seattle market is also crazy, with a good percentage of ‘irrational’ buyers. Often they are frustrated buyers who lost out on 2 or 3 houses because they were out bid. I do a lot of review work and am seeing more appraisals at less than the contract price but above the last list price, and I am able to concur with the appraised value. I also see some where the appraiser stretched to support a contract price.
Example: on Feb 25, the seller and listing agent, based on a well developed CMA, agreed the house was worth $624,000 in the current market; on Mar 5 they review the 6 offers received and accept the one for $680,000. The market did not appreciate 9% in 1 week. An appraisal a week later at $642,000 is not a “low appraisal” but may be a reasonable analysis of the market.
I know some agents are telling their sellers to accept the offer from the middle of the pack with the best down payment, and buyer agents telling their clients they may need to bring extra cash to closing.
It’s a great life if you don’t weaken. Be careful out there!
Thanks Barry. It’s wild out there. Where is the real market in the midst of all the insanity? That’s the question. An agent emailed me this morning just blown away that she’s seen properties listed at $550K get into contract at $650K. She says some buyers are beginning to waive inspections also. What a dangerous thing to do in my mind. I say get the home inspection, sewer inspection, pest inspection, etc… Buyers remorse is a real thing.
Great analysis Ryan. If the market is going up quickly, appraisers need to be right there analyzing the trend and reporting it. If the price is outside the trend, appraisers need call it out. I think your example of an appraisal with no time adjustments in a clearly upward market is all too common. Time adjustments take work and must be explained and supported. Lenders need to understand that the fastest, cheapest, and appraisal with fewest adjustments is often not the best appraisal.
Well said Gary. Thank you.
Ryan, Your integrity, class and stellar knowledge are inspirational to our industry…thank you! When verifying comparable sales with brokers, I have been asking if the transaction received an appraisal waiver and I am including this information in my reports. If my report is being reviewed at some point in the future (because of a buyback or for some other reason), this information will help the reviewer understand the market conditions we are currently experiencing. The appraisal waivers can sometimes explain outlier/inflated sales prices… As we’ve all discussed…my concern is that the sales with appraisal waivers are clouding the data set and are at least partially responsible for the “rapid price growth.”
Thank you so much for the kind words Teresa. I like what you are mentioning and I share the concern regarding appraisal waivers. For now there is no way to really know without very tedious communication with the real estate community. On the ground there are certainly some sales I am not using because they are blatant outliers. If we are lucky enough to ever get an MLS field of “appraisal waiver” then we may start to truly understand the effect if any.
This market is wonky. It’s unreal to hear similar stories all across the country about buyers waiving contingencies or even inspections. It speaks to a profoundly imbalanced market.
Millennial first time homebuyer here. Got screwed by the financial collapse when I graduated college. Finally landed a decent job and was right about to buy a house when the market went crazy. Now I can’t compete and am afraid of being priced out of the area I grew up in. I’d move to a lower cost of living state but my hospital job pays significantly less everywhere else, so there’s really no financial benefit to leaving. If I leave it’ll be just to avoid the competition of constantly getting outbid by investors and rich people with cash offers.
Its not really what you asked for but I felt compelled to comment anyway. I’ve been good and avoiding avocado toast for years to save for a house…. and now this market, lol.
First of all, your reference to avocado toast is epic. Thank you for that. And let me just say I east avocado toast probably 4-5 times per week. It’s a staple in my Gen X household. 🙂
I appreciate you sharing and I know it’s a struggle. The market is simply crazy right now and it shouldn’t be this difficult to buy a house. This type of appreciation and constraint on listings won’t last forever, but there is still no telling how and when the market would change in the future. The fear of missing out is a really big deal and I hear this sentiment throughout the market. Keep hanging in there and if you ever have pointed questions or need to bounce some ideas off someone, I’m around.
Thank you again for sharing. Sincerely.
Hey Conrad, I actually tweeted regarding fear of missing out. You inspired this tweet and I think there are some great nuggets so far. https://twitter.com/SacAppraiser/status/1370058334586376192
Thanks Ryan! Good discussion. One thing that I feel is missing out of that twitter thread is the huge difference this is from 2008. I feel like the pandemic has made work from home the norm…. a couple of tech workers from the bay can very easily afford a 500k house, much less one with only a 3% interest rate. I kinda hate them, but I can’t really blame them. I blame our state and region for never building enough housing. Its not like all these people are gonna default on their mortgages, because they were already paying MORE for housing while they were living in the bay. I think prices may well plateau, but they won’t go down. Feels like everyone figured out that Sac was the last affordable metro in California and now we’re catching up with the rest of the state in terms of housing affordability.
The struggle is real and we are certainly seeing the effect of policy. Other states are able to boom, but we cannot make that happen for so many reasons.
I will say another thing missing on the thread are people who are really in the trenches. Granted, a few people so far are listening in. Of course people can certainly empathize and there is some good advice, but this market is also profoundly more aggressive than we saw in the past. I’m just aware that people who are not actively looking may not completely understand how incredibly insane it is to try to get a house these days.
One thing I did want to note is that the Bay Area dynamic is very real, but this market is not being totally driven by those buyers either. Think about it this way. The market across the entire country essentially feels like this. So is it the Bay Area driving the country? I’d say NO. USPS actually published data last week to show 24,000 Bay Area residents moved within California this past year and only 4,000 moved out of state. So I think in some sense we have to step back and recognize the market is just simply aggressive all over the place and in large part it has to do with mortgage rates below 3% and fewer listings in light of the pandemic. Of course Bay Area migration is certainly heightened. There is no mistaking that. But I think we have to step back and admit maybe the market is just this aggressive because of other reasons too. My two cents. I hope that doesn’t sound douchey. I thought it would be useful to say.
Thanks Conrad.
My other issue in a hot market with a limited supply is cash buyers and those with appraisal gaps/waivers are dominating the market. For anyone actually needing an appraisal for a conventional, FHA, or VA loan, it’s not appraising at the winning bid because it’s too high causing those deals to fall through. Could you ever see regulations put in place regarding or changing appraisal conditions to make it easier for homebuyers using conventional loans to actually be competitive with a cash buyer?
About 15% of all sales last month in the region were cash, so 85% of the market is not cash. The most dominant financing out there is conventional, which has been hovering around 66-70% of the market lately. So buyers really need to be able to compete with conventional way more than cash.
The issue here is an irrational environment going well beyond market value, so no amount of rules for appraisers would change this. In other words, the problem is not the appraisals but total madness created by insanely low rates and anemic pandemic inventory.
Hopefully at some point we’ll have more data on waivers. While waivers are convenient, I wonder if they are giving more advantage to buyers putting down more money. It’s hard to say how many waivers are out there, but I’ve heard numbers as high as 25%. So this could be a huge issue in inflating the market if we really are seeing numbers that high. I get it of course if the Borrower is low risk and maybe there is even lots of data on file for the property at hand. But if we start seeing lots of properties closing beyond a reasonable level, that can accelerate appreciation.
At some point we’re going to hopefully understand their effect on the market. The problem though is the GSEs control the data on waivers, so we may never actually get to see data. This market is like a wild stallion though and an appraisal is a tool that is rational. We don’t need to change the tool to conform to the market, but we need the market to rather become more tame by rates going up and getting through this pandemic. Both should theoretically help. And in the background we have a housing shortage of course, so there are lots of moving parts to consider.
Great post, Ryan. I agree with your comments about being professional and not talking negatively about our fellow real estate brothers and sisters. The times we are in are definitely record-breaking so we have to proceed with caution. It’s important for all of us to share information with one another so we can all do our jobs better.
Preach. Thanks Tom. I appreciate it.
Does an appraiser take into consideration how the “inside” of the home looks, or do they just use the comps in the area when figuring out the value of the home?
Thanks
Tom
Hi Tom. Appraising is sort of like hunting for a spouse. The inside and the outside matter… 🙂 Kidding aside, typically an appraiser is going to consider what is inside because it matters to buyers. When buyers are shopping for a home it hands-down matters what is on the inside in terms of upgrades, condition, layout, bed/bath count, etc… But this is where a normal amount of furniture doesn’t matter because the appraiser really looks past personal property. However, keep in mind sometimes appraisers only focus on the outside though if the lender orders an exterior-only appraisal (drive-by). So it depends. Hope that helps.